Hopefully, you’ve read part one and heard the argument of why you shouldn’t be overpaying your mortgage. Now, it’s time to turn the tables and argue the other side of this. (As an aside, I always thought I’d be a great attorney. I love to argue, just not as much as O-man though!)
Let’s keep the same rules: we assume a lower interest rate on a 30 year mortgage. Given these favorable assumptions, why would anyone ever overpay their mortgage?
10 reasons TO overpay your mortgage:
1. You are very risk adverse. I can talk and talk (and talk) until I am blue in the face about long term market trends. I realize not everyone is comfortable taking that ride. Previously, a lot of people got burned pretty badly and those wounds are still fresh. To them, taking a 4%-5% interest payment off the table sooner relieves a lot of stress.
2. Overpaying a mortgage helps de-risk a person’s finances. Some people have ample amounts of investment savings. Funds are set aside for college (or already paid) and they have sizeable portfolios preparing them for the future. However, markets are volatile. Even with upward trends, there can be sharp pull-backs as well. For these individuals, it may make sense to put a little extra towards that mortgage each month (or at bonus time). By having that mortgage paid off sooner, it protects against downturns (as ones fixed expenses are lessened).
3. You can time the payments to be completed by retirement. I’m a big fan of this when relevant. A lot of people are on a great track for retirement; they have saved adequately and don’t require an expensive lifestyle to keep them happy. In these instances, if overpaying their mortgage doesn’t strain their finances, then this could be a good idea. Timing it to be done around retirement can also be a massive relief.
4. When overpaying is simply rounding up. What I mean is you and your spouse are doing well financially. Your mortgage is $2,845/mo and you decide to round it up to an even $3,000. That $155/mo is no big deal! This simple rounding up can lead to taking years off of your mortgage and thus saving thousands of dollars of interest.
5. You don’t have a standard mortgage. Believe it or not, people still have mortgages which balloon or adjust. If you are one with that type of mortgage, it is likely due to the fact it was more affordable at the time. However, paying extra now may make sense as it will lower the payments when this period adjusts to a more expensive mortgage. Thus, the remaining mortgage payments will be more affordable.
6. You put down less than 20% and are paying PMI insurance. There are many people who couldn’t afford to put 20% down on their home when purchased. In those circumstances, the sooner you have 20% equity, the sooner you drop that pesky PMI. This can free up capital sooner to be invested elsewhere and/or make monthly expenses more palatable.
7. Your job is not secure or has big variances in compensation. I’ve seen this first hand. One year, a client’s bonus is well within six figures, but the next year there’s no bonus at all. Others have jobs that (they feel) aren’t secure. If either of these sounds like you, getting rid of debt exposures may be a smart move. Granted, you could also invest and keep these dollars liquid just in case. (But, I’m not arguing that point here!)
8. This is your forever home. If you know you’re in this house for the long term, there is a better argument to overpaying. Let’s not forget–becoming debt free can be very appealing!
9. You lack discipline. I don’t like to look at overpaying your mortgage as forced savings, but sometimes it is. There are people out there not saving and they need to! Overpaying your mortgage at least gets some additional dollars put away. You know what they say, something is better than nothing.
10. You are going to be standard deducting regardless. This option may be because you are towards the end of the mortgage and don’t have a lot of interest payments, or you don’t have itemized deductions due to the favorable ($24,000 married filing jointly) threshold. In any case, overpaying in these circumstances makes sense if you are getting the benefit of deducting the interest. If you aren’t, sit down with your planner or tax person and figure out the net benefits (or lack thereof).
The debate continues:
In the end, there really is one question that comes out of this discussion–do you overpay your mortgage or not?
Hopefully, reading this has given you a little more direction. At least, perhaps you now question what makes sense for you. Every situation is unique and circumstances can always change. As long as you’ve partnered up with a good financial planner, I am confident you’ll figure out what is the right decision for you.
Speaking of… as promised in the first blog, I’ll let you know what I do personally. As a financial planner, I feel confident I am positioning my finances to accomplish all my goals. Therefore, I round up each month (along with throwing an extra payment in occasionally–with bonus dollars or during a three pay month).
Now, as one of my favorite SNL skits (Coffee Talk with Linda Richman) used to say… “talk amongst yourselves.”
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