Pay Down Your Mortgage ... Or Not
This is another tip that depends on your individual situation. Making an extra mortgage payment each year can save you thousands of dollars in interest over the course of a 30-year loan. But for some homeowners, even those who may already be paying down the principal each year, it makes more sense to put that extra cash to use somewhere else. First, let's look at when not to pay down your mortgage.
Mortgage rates have been hovering at or near historical lows for a few years now. If you have an interest rate in the 4 to 5 percent range, you'd be better off building an emergency savings fund, contributing to an employer-matched 401(k) plan or paying down higher interest credit cards, particularly since your mortgage interest is usually tax deductible, unlike the interest you pay on other debts [source: Lankford].
If your mortgage rate is higher than 5 percent, consider refinancing while rates are low. You could end up with more cash in your pocket every month to put toward savings or other loan payments. Sites like Bankrate.com offer calculators that allow you to plug in all sorts of scenarios to see which one saves you the most.
If you've paid down your other debts and the rest of your financial picture is in order, there's something to be said for the financial and psychological benefits of getting out of mortgage debt as fast as you can. To make an extra mortgage payment each year, divide your normal mortgage payment by 12 and add that amount to your monthly payment. Be sure to tell your mortgage lender to apply the extra amount toward your principal balance. Yes, you'll actually be paying more per month in the short term, but the long-term savings can be significant, and well worth it.