The idea of paying more than what you are bound to pay on mortgage sounds insensible. But after analyzing it in detail, the thought of overpaying mortgage can make a lot of sense. However, it is not simple as it seems. There is a lot to think about putting extra money in mortgage rather than investing it somewhere else. In the end, it is all about assessing the risks and opportunities.
Calculation Of Mortgage
The discussion can be started with looking into how a mortgage is calculated. The amount of loan times the interest rate each month is the monthly payment you are obliged to pay. Real estate taxes, principal, interest and mortgage insurance makes up the total monthly payment.
Higher the interest rate, higher the mortgage payments you will have to make towards the interest portion and vice versa. The portion dedicated to interest decreases and the portion dedicated to principal increases each month the mortgage payment is made. The interest rate each month is calculated based on the outstanding loan remaining.
Why Should You Overpay On Your Mortgage?
Here are some of the benefits listed of overpaying your mortgage:
- Overpaying your mortgage and directing the payments toward principal not only reduces the principal amount but also reduces the amount of interest that needs to be paid over a period of the mortgage. For all the homeowners who are planning to stay in their current home for a long period can pay down the mortgages to receive the best return on investment.
- It shortens the time needed to end-up mortgage free. It doesn’t only contribute to reducing the interest payments significantly but it also makes you mortgage-free earlier compared to not overpaying your mortgage.
- Overpaying your mortgage builds up equity in your home. Amount of money putting towards principal amount of the loan builds up equity automatically. The equity savings are accrued in your home each month when you save interest by overpaying the mortgage. Extra payments enable you to build equity. The equity can then be used by refinancing or through the sale of your property.
You can also easily calculate how much you save by overpaying your mortgage.
It doesn’t only come with merits. There are some drawbacks associated with overpayment as well.
- Many homeowners who overpay their mortgages are missing out on a number of investment opportunities. Furthermore, for many people, home is one of their most important and valuable assets. Paying off the mortgage early doesn’t increase asset’s worth. The chance to diversify the investments are wasted.
- Early payment of mortgage means there is lesser money in your hands which ultimately results into a lesser advantage of tax deductions. Tax money that is saved through deductions mortgage can be a lot. Overpayment of mortgage decreases this effect and may even result in losing a lot of money in the long term.
In this article, you found some reasons why you should overpay your mortgage but some drawbacks are listed as well. Even though there are some disadvantages, the benefits seem to outweigh them clearly.
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