Why Not?

I was chatting with a friend from home a few weeks ago. Soon, we started talking about mortgages. Here is his scenario.

30 year fixed loan

90% financing

Low interest rate

This young lad has made some pretty wise decisions! After all, he is planning on living in this home for a long time. He is in the right loan product and he is locked in at a competitive interest rate which will save him thousands of dollars over the life of his loan.

Problem: He is putting every spare dollar towards paying off his mortgage as soon as possible.

Question: Why is this a problem? Won't this save him even more money in interest paid?

Answer! Before paying down your mortgage, take some time to evaluate your overall financial situation.

1 - Do you have any other debt that carries a higher interest rate? (i.e. auto, personal loans, credit card debt)

2 - Do you have at least enough money in the bank to cover 6 months of expenses?

3 - Are you on pace to retire at the income level you desire?

For those who are not carrying extra debt, have substantial savings and are investing for retirement.... go ahead and pay that mortgage down.

For the rest of us.... don't do it!

When you pay towards a fixed rate mortgage, you lose liquidity. In other words, that money is no longer yours and you can no longer access those funds.

What will happen if you lose an income or encounter unforeseen expenses and find yourself unable to make your mortgage payment? Will the bank give you a credit for the extra payments that you have made?

Nope. The bank will begin the foreclosure process. Not only would you lose your home, but you'd lose all of those extra payments as well. Yikes!

Don't fear! With a little education and a little bit of discipline, you can build some reserves, save for your retirement and pay down your mortgage early!