Do you have extra money left over in your budget each month? Have you received a large influx of extra cash, such as from a tax refund? While you could squander your extra money, there are more responsible options available. Paying down your debt balances is a sound idea, but which debt should receive your attention? Before paying extra money on your mortgage payments, you need to be aware of the true impact of doing so.
Saving Money Through Debt Reduction
When you make extra mortgage payments, you are directly increasing your home equity. However, you need to focus on the interest rate and amortization schedule for your mortgage versus other debts. When you make an extra payment on a credit card with a revolving loan term and a high interest rate, you could be reducing a larger chunk of interest charges than you would if you apply that extra cash to a low-interest, fixed-rate debt like your mortgage.
Reducing Future Monthly Payments
Your loans with a fixed term, such as your mortgage and car loans, have a fixed term with a required minimum monthly payment. When you make a larger payment one month, the next month’s required payment will be unchanged. You will not see a difference in your monthly budget until the end of the loan. Depending on the amount of the loan that have repaid with extra payments, you could have a lower final payment or an adjusted loan payoff date. On the other hand, if you apply that extra payment to your credit card balance, the future payments will be lower. This means that you could immediately benefit from your extra debt payment.
Before you decide which debt to focus on, take a look at the interest rates and loan terms for all of your accounts. Think about your financial goals for the feature. Analyze the impact of making extra payments for each of your debts. By doing so, you can clearly see which debt should receive your extra attention today.
Contact one of our loan consultants to learn more.