![]() Home purchases require a lot of liquid cash (i.e., money that’s not tied up in your home equity). Focus on paying off high-interest debts first before you make extra monthly mortgage payments. ![]() When you SHOULD NOT make extra mortgage paymentsĬredit cards and personal loans typically have higher interest rates than mortgages. For example, if you’re planning on retiring soon, cutting out your monthly mortgage payment will drastically reduce your retirement expenses, helping you live longer on your savings. Paying your mortgage early frees up your income and allows you to focus on other goals. Only when your finances are rock-solid does it make sense to add an extra mortgage payment. You have an emergency fund, you’re saving for retirement, you and your family are properly insured, you don’t have high-interest debts, and your income is stable. When you SHOULD make extra mortgage payments Is it worth making extra mortgage payments? Your interest rate, on the other hand, doesn’t include additional costs, like loan origination fees or mortgage points. It includes your interest rate, loan fees, and any other annual costs. What’s the difference between interest rates and APR?Īn annual percentage rate (APR) is a much broader measure of what you pay to borrow money. As you pay down your initial loan, your interest charges gradually decrease.įor instance, if you have an interest rate of 5% on a home loan of $300,000, you would pay $15,000 in interest charges for the first year (or $1,250 per month). □ Interest rate: what you pay to borrow money to purchase your home, calculated as a percentage of your loan balance. When you put extra money toward your initial loan balance (the principal), you can pay your loan faster and save on interest. □ Extra payments: what you pay in addition to your regular monthly mortgage payments. For example, if you’ve been paying a 30-year mortgage for 5 years, then you have 25 years left. □ Years remaining: the time that’s left on your mortgage. For example, a 30-year mortgage would have a loan term of 30 years. □ Term of the loan: the amount of time you’ve agreed to pay off your mortgage. When you make extra mortgage payments, you’re reducing this initial loan. □ Initial loan amount: how much you originally borrowed to purchase your home. Save thousands if you decide to sell! 100% free with no obligation. Is it worth almost $1,000 more to have it now (furthermore, the retail price in 3 years will probably drop)? That is like going into a store that advertised "SALE-ADD 20% TO EVERY PURCHASE.□ Thinking about selling? Use Clever to find a top local agent, get a pro valuation and advice. If purchased on a credit card with a 12% annual percentage rate (APR) compounded daily, and with minimum monthly payments of $166 paid over three years, it winds up costing over $5,980. Here is an example: a new television flat-screen HDTV model retails for $5,000. If one calculated the true cost of goods bought on credit, one would have second thoughts about making the purchase in the first place. Many impulse purchases are made on credit with little thought given to how the debt will be repaid in the future. One should never use credit to purchase things for which one will not be able to pay in the future. Credit abuse increases the cost of credit to everyone. Goods and services are provided on credit with the expectation that they will be paid for with money in the future. Credit is extended with the faith that borrowers will repay the debt. While credit is very important to the economy, its abuse is harmful. The marketing is so aggressive that consumers may lose sight of the fact that this is not free money and make excessive purchases to the point where they find themselves in financial difficulty. This is why credit card companies aggressively compete to get you to use their credit cards and services. This represents hundreds of billions of dollars in interest earnings to lenders. According to the Federal Reserve, there was more than $2.5 trillion of consumer debt outstanding by late 2009-this is more than double the amount outstanding in 1994. Credit is issued by banks, savings and loans, credit unions, public utilities, and even merchants. Today, credit has become a business in its own right. ![]() One should not use credit in place of money when there is little or no likelihood that payment in real money will be made-using credit without the intent or ability to pay is theft. Derived from the Latin word for "trustworthiness," credit is based on faith that the borrower will repay the debt with real money. While credit stimulates the economy, it does have to be used judiciously.
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