If you want to pay off your mortgage before you retire or reduce the amount you will have to pay in interest over the life of the loan, you may be thinking about making extra payments. That may be a wise move under some circumstances, but in many cases, you will be better off putting that money toward your retirement.
How Investing Early Can Help When Saving for Retirement
Retirement accounts benefit from compound interest. The funds that you invest will earn interest, and that interest, in addition to the principal you invest, will be reinvested. The more years your investments have to grow, the greater the potential benefit. You can wind up with a large nest egg if you put money in your retirement account early and give it time to grow.
When to Make Extra Mortgage Payments
If you decide to put extra money toward your home loan, you will get a greater benefit if you make additional payments early in the repayment period. In the first years after you take out a mortgage, a large percentage of each payment goes toward interest. If you pay more in those years, you will be able to lower the principal balance, which will reduce the total amount you will pay in interest over the entire loan term and will also help you pay off the mortgage early.
Making extra payments later in the repayment period may be helpful if you have an adjustable-rate mortgage that will reset soon. Reducing the principal balance may allow you to refinance to a lower, fixed rate.
Paying extra later in your loan term can also be a smart move if real estate prices are on a downward trajectory. Lowering your mortgage balance can help you preserve equity, which can be beneficial if you decide to sell or refinance your home.
How to Work on Both Goals at Once
Another option is to focus on saving for retirement and making extra mortgage payments at the same time. Making regular contributions to a retirement account while making extra mortgage payments, especially early in the repayment period, can allow you to reap the benefits of compound interest in your retirement portfolio while reducing your mortgage balance and the total amount you will have to spend on interest.
Talk to a Financial Advisor
Everyone’s financial situation is unique. Your income, current retirement savings and mortgage balance, family status and future goals, as well as the local real estate market and overall economic conditions, are important factors to consider. Consult a financial professional who can give you advice that is tailored to your circumstances.