Mortgage Acceleration

The easy answer is Yes, Absolutely! But wait. Things are never that simple. It's great to build more equity in your home and it's always good to get out of debt, but your home loan is probably at a lower rate of interest than any other debt you have, so maybe that extra money should go on one of those high interest credit cards if you're carrying a balance every month.

Another consideration is that paying down your home loan puts your money where it isn't easily accessible. If you lack discipline where money is concerned, maybe this isn't a bad thing. On the other hand, be sure you have a stash someplace for emergencies before you put your last dollar toward mortgage reduction.

Here's an idea: Take out a home equity line of credit, first. Make sure it's a good one that doesn't cost anything unless you use it, and then offers good, sensible terms. Now you can pay down on your first mortgage with less risk, since you'll have the credit line as a backup for emergencies.

Confused yet? Better take a deep breath and walk around your chair 3 times. We're just getting started.

Let's pretend you just got a $1,000 windfall. Let's also pretend you have a new $150,000 mortgage. The following calculator is all set up for that number. Hit calculate and look at the interest number. If you keep this house for 30 years, you'll pay $180733.24 interest on that $150,000 mortgage.

If you took that same $1,000 and put it in a 5% money market fund or bank CD, at the end of 30 years you'd have $4,440.21 (compounded quarterly).

Unfortunately, even this example is too simplified. It doesn't take into consideration the income tax you'd have to pay on the CD, while your home equity grows tax-deferred. Also, these numbers change as interest rates change.

Some other considerations are:

PMI (Private Mortgage Insurance). If you have a 90% loan or more, you're probably paying that hidden fee each month. If you can pay down your mortgage enough to reach 80%, you should be able to refinance and make PMI go away. Recent laws may have changed so you can get rid of PMI without refinancing if you've increased your equity to 20% of your home's value. It's definitely worth a phone call to your lender if you think you're paying this fee unnecessarily. (Read Sweat Equity for more ways to tip the scales in your favor.)

Variable vs. fixed rate loans. If you have a variable rate mortgage, paying additional principle this year could lower your payments next year, if rates don't go up. With a fixed rate mortgage, your payments will stay the same until the loan is paid off (except for taxes and insurance which only seem to move in one direction.)

Forced savings. If you're planning ahead for a major expense, like college for your kids, paying extra on your mortgage can help make refinancing easier later on.

Round up your mortgage payment to the nearest $100. Your budget will probably never notice, it will make balancing your checkbook a little easier, and you'll accelerate your mortgage painlessly.