Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
Much of why mortgage rates have gone up is due to the anticipated rise in inflation. There are certainly other variables, but most bond and finance experts attribute a lot of the recent volatility to inflation pressures. As a reminder, the Federal Reserve has two primary objectives which include keeping inflation at about 2% per year, while stabilizing prices and maximizing employment. For years, the Fed has been unsuccessful in pushing inflation higher, but we are finally starting to experience the effects of that now. Higher inflation also means an increase in prices and a decrease in the purchasing value of our money.
In simple English, that means the same amount of money will get you much less than it did in the past. The current market environment should encourage people to reevaluate their deployment of cash, and how they allocate their funds. One of the more common questions I get during cycles like these is whether someone should put extra money toward paying down the mortgage on their home, or would they be better off placing the extra cash into a savings account?
Deciding whether to pay down your mortgage or add to your savings is a complex choice, and it depends on many factors in your financial situation. Here are some of the things that you will need to consider when making the decision:
Your Rate vs. The Bank Rate
Take a look at the accounts where you are keeping your money and assess the interest that your savings are earning. Is your cash earning more in savings than you would save by paying down your mortgage earlier? Are you factoring in all the tax benefits? Are you maximizing your savings to the fullest? Are there alternative options where you can deploy your monies for a better return?
Prepayment 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. Alternatively, does it pay to recast or re-amortize your payment options, and does your current mortgage permit such options?
Higher Cost Debt
Although this might sound obvious, it doesn’t make sense to be overpaying on your mortgage if you have credit card balances with high interest rates. Debt has a funny way of creeping into people’s lives subtly, and without stopping to evaluate your finances, this can go unnoticed. Prioritize your high-interest debt first before you think about overpaying on your mortgage.
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 reoccurring expenses in a bank account just in case you need it. This is a priority, and only when you have this emergency fund established should you consider overpaying on your mortgage.
These are just a few of the essential factors that you should consider when deciding whether to overpay the mortgage on your home or use the money elsewhere. For more information, contact your trusted mortgage professional.
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