Should You Pay Down Your Mortgage
In the old days (much of the last century), many people stayed in their homes for 30+ years, long enough to pay off their mortgages and live mortgage-free ever after.
In the more recent past, mortgages became transient instruments, remaining in existence barely longer than a subatomic particle, long enough only to get to the next cash-out or rate/term refinance.
Few people gave much thought to the contribution of principal payments toward increasing their equity when they were banking much greater equity gains through price appreciation.
It might be time to give a little more respect to the advantages of paid-in equity, not just required amortization payments, but optional payments of equity that reduce a mortgage balance.
One virtue of paying down your mortgage is that you are effectively guaranteeing a rate of return equal to the interest rate on the mortgage.
The recent chaos in the financial markets has many people too shell-shocked to do anything with their money except shove it under the mattress or put in government bonds.
We are sure that there are investments that will pay better returns in the next five years than paying down your mortgage. We just don’t know today exactly what those investments are.
For the highly risk-averse homeowner, paying down a mortgage will yield a return that is set (with a fixed-rate mortgage) or at least determinable in the short run (with an adjustable).
The age-old problem of paying in home equity, of course, is that money committed to equity has limited means of access. These days, those means—home equity credit and cash-out refinancings—have higher hurdles to clear.
So, if you anticipate needing cash for some purpose in the future, your home equity may not be there for you to easily lay your hands on.
As a consequence, you should make sure that you have adequate cash reserves and have paid off high-rate credit card debt before embarking on a program to pay down your mortgage.
If you decide to make extra payments toward principal, do review your mortgage documents to see what, if any limitations there might be. Most will allow extra periodic payments in sizable amounts, but be sure.
The current market situation has created two circumstances that might warrant special consideration of a mortgage paydown, either in the form of a lump sum or with periodic payments.
(1) You have the income and inclination to sell your current home and move up or away, but you are underwater on your mortgage (owe more than the house is worth).
(2) You would like to refinance, but don’t have sufficient equity for the programs that you are interested in.
By paying in equity, you will be able to achieve either of these objectives faster than if you simply wait for housing prices to begin rising again.