If you have extra cash left over every month, you may be wondering if you should use it to pay down your mortgage. Here are a few possible options that could maximize your finances. Remember, personal finances vary, so you should always consult with your accountant or financial advisor before making any major decisions regarding your mortgage.
Shorten the term of the loan
If you are confident you can afford a higher monthly payment, you could look into refinancing your mortgage into a shorter loan term. While your monthly payments would be higher, the time it takes to fully pay off the loan would be shorter.
The downfall to this option is that you are locked into that payment, so some of your flexibility (should I pay extra this month, or go on that vacation?) may be lost. In addition, paying off your loan could affect you at tax time. Speak to your financial planner to see if shortening your term is the right choice for you.
Refinance to a lower rate
If you purchased your home at a higher rate than today’s current loan rates, you may benefit by refinancing even without changing your loan term. The best case scenario after a traditional refinancing is that you continue to pay your same monthly rate, but more of your payment is going towards principal than in the past.
The downside to refinancing is that you incur closing costs and additional fees. A financial expert can help you determine if the long-term benefits of refinancing outweigh the upfront costs.
Pay more when you can
If you don’t want to refinance, you may be able to accelerate your payments to pay off your mortgage faster. Some people pay every two or three weeks instead of once a month, while others add a few hundred dollars to their payment on months when they have extra cash.
Again, remember to consult your financial advisor before making any major decisions about refinancing or paying down your mortgage. Everyone's finances are different, so it's important to get an expert opinion.