Despite the connotations of the title, we are not telling you to worry about paying your monthly mortgage payment after all other expenses are paid off. That’s risky business. To the contrary, your monthly payment should be one of the first things you pay.
Paying down your mortgage last refers to the time it takes you to pay off the debt completely. In the grand scheme of debts, savings, and other investments, it should be the last debt that gets overpaid.
A Home Mortgage is a Huge Decision
A mortgage for a home is probably the biggest weight you’ll ever carry. On top of borrowing hundreds of thousands of dollars for a single purchase, you have to worry about paying it off over thirty years (in many cases). That means you won’t see an end until you’ve reached the end of your career. The prospect of paying off a loan for that long can be somewhat depressing. Many want to get out of debt faster, so they put extra money into their monthly mortgage payments at the end of the month. This plan is riddled with the following dangers:
Consider Your Retirement
Every penny you put towards paying off your mortgage could be better placed in retirement. The longer you ignore the necessity of saving for retirement, the harder it is to gather enough money to retire comfortably. In fact you could find yourself wanting at the end of your career and wishing you had spent a little more effort saving money rather than squandering it on a loan you would have paid off by that point anyways. To avoid that possibility, prioritize saving extra money into your retirement as opposed to paying off your mortgage.
Also invest in yourself. Save some of that extra money you would normally spend to get you out of debt. You want a hefty emergency fund, just in case you lose your job or suffer another form of financial setback. In a way, you’re insuring your ability to keep the house should you suddenly lose a large chunk of your monthly income.
That loan is going to be with you for a very long time. Your monthly minimum is due every month, regardless of whether or not you’ve been overpaying in recent years. If you save the money instead of add it to your mortgage payment, you’ll have it later to pay off your monthly obligation should you be out of work or unable to pay your bills that month. You need an excessively large savings fund to do that.
That fund takes a lot of time and effort to build. Put everything you can into it to secure your financial future in the event of emergency. If an emergency never comes around, you’ll have that much extra to put towards your retirement.
Consider Your Other Debts
Your other debts will hurt your more. Debts like student loans, car loans, and home equity lines have higher rates of insurance, meaning you’ll be paying far more percentage wise for those debts than you would for the mortgage. Concentrate on taking care of these smaller debts first so you can be as debt free as possible (freeing up more money later for retirement and other savings accounts).
Now, if the time comes that you have your retirement well under control, have a hefty savings account you could live on, take on no other debts, and still have money left over, then you should start looking into getting out of your mortgage faster. Pay a bit of extra money every month. Ensure that it is applied to your principal and not just saved for the next month’s payment. Your lender will likely assume that the money is to be set aside to cover next month unless you specify otherwise.
Start paying biweekly. Pay half of your monthly mortgage payment every two weeks. Since months don’t divide perfectly into four week increments, you’ll end up paying an extra mortgage payment at the end of each year.
Refinance your loan to a shorter term. Talk to your lender about refinancing based on good behavior. You’ll likely have to pay more every month, but you’ll get out of debt sooner that way. Sound like a better deal?
Also, don’t pay a service to handle any of these options. Ask for a free opportunity to do it yourself.
Take advantage of financial opportunity to get yourself out of the biggest debt of your life. Wait until your retirement and savings are in hand, and your other debts are paid off before you do that though. There’s too much risk in throwing your extra money into the black hole of your mortgage when you’re not already prepared for the future.