Being a new homebuyer is hard. You get all kinds of advice, and it can be difficult to sort through all the information you’re constantly receiving. How do you know what’s true and what’s not? Or, even more so, how do you know what the best option is for your situation?
One topic that may have come up during your homebuying journey is overpaying on your mortgage. Paying extra on your mortgage has its benefits, but that’s not to say that it’s the right choice for everyone. Below, we’ve discussed the topic in detail.
Mortgage Overpayment – What Does It Mean?
Paying extra on your mortgage means paying more than you have to each month. Per the terms of your loan agreement, your lender sets a minimum amount that you must repay every month. However, you are typically free to pay more at any time.
Essentially, mortgage overpayments include:
- Regular overpayments
- A one-off lump-sum overpayment (if you have extra cash on hand, then you may consider putting it towards your mortgage)
- A mix of the two
Advantages and Disadvantages of Paying Extra on Your Mortgage
If you have the extra funds, overpaying on your mortgage could be a good idea. But it’s not the right option for everyone. There are pros and cons to paying extra on your mortgage, and these should be considered carefully before making your decision.
Here are some benefits of paying extra on your mortgage include:
- Reduced interest: When you overpay your mortgage, you pay it off earlier, so you end up paying less interest. This can save you a considerable amount of money.
- Increased equity: Paying over on your mortgage can help you build equity. Equity is the difference between your outstanding loan balance and what your home is worth.
- Relatively better than savings accounts: Sometimes, it makes sense to pay extra on your mortgage compared to keeping the money in a savings account. This is because you can gain more from your mortgage interest savings than you do by keeping the money in a standard savings account.
Here are some disadvantages for you to keep in mind when it comes to mortgage prepayment:
- Less money for your emergency fund. It is a good idea to have an emergency fund. That way, if you are hit with some unforeseen expenses or your financial circumstances change, you’ll have enough money to get you through. But if you are using up all your spare funds to overpay your mortgage, you put yourself at risk financially.
- Prepayment penalties. Many lenders charge a prepayment penalty. It’s important to be aware of any fees or penalties you may incur if you pay off your mortgage early.
- Other debts. Mortgage interest rates are usually lower than other types of debt, including credit card debt. Debt with a higher interest should be paid off first.
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