Should I Pay Extra on My Mortgage?

If you mean do I pay extra toward my principle, then yes. While many financial advisors — and many “armchair” internet “experts” — will tell you not to do this, because you can get a better return in the market, that’s not always the best case. That you have to figure out yourself.

Here’s a couple of reasons to starting paying down your mortgage:

  1. You don’t have enough equity (the difference between what you owe, and the home’s value). If you don’t have at least 20%, pay it down.
  2. You’re getting closer to retirement, you’re debt free, and you’re saving at least 10 percent toward retirement. Use the extra funds to pay it down. If you hit retirement with a home free and clear, you’re going to be glad you did.
  3. Having no mortgage, especially if you’re already retired, gives you the option of using the equity in your home for retirement funds, such as a reverse mortgage. I wouldn’t recommend this for everyone, but it is an option. (Having a sufficient retirement account and income is the best plan.)

I built my retirement house the year I retired. This may seem weird to many, but during my get-out-of-debt phase, I had sold my house — and my rental property, which was not really generating much cash flow— and rented to lower my expenses. I choose to buy a home again to lock in my housing costs, and the added benefit of building just what I wanted. (I assumed that rents would continue to go up, while a mortgage is pretty predictable).

For the last three years, I have used option #1, because I only put 5% down on my VA loan (I could have put more down, buy why tied up all the extra money right off the bat?) However, now that I have reached 80% equity value, I just reduced my extra principle payment so that I’m paying at least as much principle as interest. I don’t need to do this, but thought I’d keep the principle moving downward faster than regular loan payments. And I can adjust the extra principle downward each year. The extra funds can now go back to savings/investments.

The adage that you can earn more in the market than the cost of your mortgage is not necessarily true for everyone. There are many variables: 1) predicted market returns for your portfolio, 2) the current interest rate environment and 3) your mortgage interest rate.

While I choose option #1, at least for the early years of the mortgage, this may not make sense for anyone else. You have to sit down and do the work.

Critical Financial Steps When Buying a Home

Refinancing your VA Loan

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