There are reasons for you not to pay more on your home loan. One is the fact that you’re going to turn your liquid asset (cash) to an illiquid asset (house). Considering the historic low rates today, it may make more sense to invest your extra money in stocks or mutual funds to get better returns someday. Other practical homeowners simply prefer to save the money for retirement than making the lender richer. There are instances, on the other hand, that paying more monthly would do more good than harm. Here are some of them:
Build Home Equity Faster
Here’s what happens when you pay more than you have to every month: your loan term gets shorter, you save tons of interest, and you build plenty of equity on your property quickly. If you’re unfamiliar with the term, it’s simply a fancy word for home ownership. It’s the difference of its value minus the charges against it. In short, higher equity means a higher portion of ownership and greater value.
Any self-respecting provider of mortgage loan services would tell you that home equity is important. Naturally, you want to have a high amount of equity on your house to avoid being in an upside down position and have the option to turn it into cash through cash-out refinance down the road.
Pay Less Interest
If you’re allowed to make extra payments, the additional money goes directly to cut down your principal balance. Only your regular repayments are used to pay off the interest. As you regularly bring down your principal over time, the size of your loan amount decreases faster, helping you save hundreds or thousands in interest.
Finish Loan Early
While most Americans don’t really maintain their mortgage that long, paying it in full is the best way to free you from this major debt. Imagine this: without your mortgage repayments, you could loosen up your budget and have more room for other expenses you couldn’t afford before.
There’s no straight answer to whether or not you should pay more or just enough every month. The key is to analyze what’s best for your situation while doing your due diligence every step of the way.