Every other month one or the other of my friends discuss “Is Overpaying mortgage payment worth it?” Three common benefits cited in favor of overpaying on mortgage payments are
- You will save a ton on interest
- You can reduce the mortgage term
- You can gain equity faster
On the other side of the fence, people cite the following reasons not to overpay on your mortgage payment.
- You can gain higher returns by investing the extra payment elsewhere
- Lack of liquidity
There is no right answer to this question of “If you should overpay on your mortgage payment”. It depends on your situation.
You should not overpay on mortgage payment if you
- Do not have an emergency fund saved
- Not maxing out on retirement accounts like 401K and Roth IRA
- Can earn higher returns then the 3% to 3.5% you are saving on your interest payment.
- If you are planning to sell this home in the next 10 years
You can overpay on mortgage payment if you
- If you paid less than 20% down payment and you are a paying PMI
- If you have an emergency fund saved and you are maxing out on 401K
- If you have a habit of spending the excess money on unnecessary things
- You hate debt and want a piece of mind with a roof to live sooner rather than later
There are basic things like paying off your PMI and saving for emergency funds. Once these are taken care of, then you should decide what is best for you. Personally, I do not overpay on my mortgage. As one of the Reddit User mentioned, the choice is between emotion and math.
“Do you value Math or Emotions? Again, 7> 3.375, so investing in the market/401k is going to make you more money (math). However, there isn’t really a dollar value you can put on being debt-free and actually owning your own house(’emotion).
In the end, after getting rid of PMI, either option is completely 100% the right thing to do. As long as the money is going towards your future, it’s the right thing to do.”