So you find yourself with a little bit of extra money – perhaps due to a raise, an inheritance or an unexpected windfall?
Should you put all of your money toward paying down the mortgage on
your home? Or would you be better off placing your extra cash into a
Deciding whether to pay down your mortgage or add to your savings is a
complex choice and it depends on a number of factors in your personal
Here are some of the things that you will need to consider when making the decision:
How Much Are Your Savings Earning?
Take a look at the savings accounts where you are keeping your money
and assess the interest that your savings are earning. Is your money
earning more in savings than you would save by paying down your mortgage
Does Your Mortgage Have Overpayment Penalties?
Some mortgage lenders will charge you a fee if you try to repay your
mortgage earlier than the agreed upon term. Check with your lender to
find out and calculate whether the extra costs will outweigh the
benefits you get from overpaying your mortgage. If they do, put your
windfall in savings instead.
What are Your Other Debts?
It doesn’t make sense to be overpaying on your mortgage if you have a
lot of credit card debt that is charging you an enormous amount in
interest. Prioritize your high-interest debt first before you think
about overpaying on your mortgage.
Do You Have An Emergency Fund?
You should always have an emergency fund in cash that will protect
you from having to use expensive credit card debt if an unexpected
payment comes up such as a burst pipe or a flat tire on your car or if
you lose your job.
A good rule is to have the equivalent of three to six months of
savings in a bank account just in case you need it. This is a first
priority and only when you have this emergency fund established should
you consider overpaying on your mortgage.
These are just a few of the important factors that you should
consider when deciding whether to overpay the mortgage on your home or
place the money in savings. For more information, contact your trusted