If you have a surplus in your budget or a lump sum, you may make extra mortgage payments and enjoy several benefits. For example, eliminating debt increases life flexibility. You can also save a huge amount in interest.
Benefits of making Extra Mortgage Payments
Making extra mortgage payments should not be a burden to individuals who have extra coins in their budget. Doing so offer many benefits to these individuals. In the end, these individuals will end up saving more money. Some of the benefits of making extra mortgage payments include:
⦁ Reducing Interest Costs
Mortgage loans have low-interest rates compared to other loans. However, mortgage loan balances are substantial. In the long-run one ends up paying huge amounts of interest. A huge amount of the interest cost gets paid in the early years of the mortgage loan.
⦁ Eliminating Debt
One increases life flexibility by clearing debts early. Without debts, one can retire on a little fixed income. Even venturing into business without the distress of monthly payments. Thus, debt-free individuals enjoy the freedom of choosing various paths in life without worrying too much.
Ways of Making Extra Mortgage Payments
There are several ways of making extra payments. Choosing the best way for an individual depends on his/her preferences and financial status. A person may choose one of the following ways:
⦁ Increasing Monthly Payments
If a person’s income comes monthly he/she may prefer to pay the mortgage monthly. Thus he/she can add a little amount to the monthly mortgage payments. He/she can send a check. Or even instruct the lender to take the monthly extra amount through electronic means. This way the person can fit the extra payment into the monthly budget. In the long term, the individual will chip away at the long-term loan balance.
⦁ Making Lump-Sum Payments
If you have a substantial amount in savings you can put a good chunk of the money toward the mortgage payment. A good number of people like making an extra mortgage payment per year. That is, making 13 payments instead of 12 per year. Others choose to pay a sudden influx of money such as inheritance or bonus. Most lenders allow all these options.
However, one should first verify that he/she won’t cause any trouble by paying an extra amount. One should seek complications or penalties that can arise by paying off the mortgage loan early.
Other Ways of Using the Extra Cash
Paying off the mortgage loan early is a good idea, but there may be better options. Furthermore, some may not prioritize mortgage payment and focus on paying other debts. While making extra mortgage payments it can be hard to have a substantial amount as petty cash. Thus, it can be hard to meet emergencies due to lack of adequate amount.
Before directing the surplus money into payment of the mortgage, one should evaluate his/her needs. The evaluation will enable the individual to choose the best way to spend the extra cash. The following are some of the ways of spending the extra cash:
⦁ Paying High-Interest Debt
It makes sense to clear very high-interest debts before clearing the mortgage. This way one can reduce the interest costs that arise from the high-interest debts.
⦁ Building an Emergency Fund
If the income isn’t regular or stable, it’s wise to have an emergency fund to cover unexpected expenses. Getting an emergency loan may be a hectic process and the loan may take time before approval. Hence, it may be hard to cover unexpected emergencies.
It’s a good idea to have several months’ worth of living expenses in savings. The savings will enable you to absorb any financial surprises without the pressure of taking loans or drastic sacrifices.
⦁ Saving for other Goals
People always want to make progress on long-term goals. Thus some may prefer to achieve these goals first before clearing the mortgage loan. Such individuals can direct the extra cash into savings to accumulate funds to achieve these goals over time. Some find it easier to create wealth by venturing into investments and paying the mortgage for a long period.