A home mortgage payment can be a large or even the largest expense in a person’s budget, and not having this payment any longer can be a life changing experience. Because of this, you may be dreaming about the day when you no longer have to make this payment. Some people may even actively make extra payments to their mortgage in order to pay the outstanding balance off more quickly. These may be funds from an IRS tax refund, cash received from the holidays or a birthday or some other windfall. Before you make the decision about whether to use spare funds to pay your mortgage down more quickly, consider these pros and cons.

The Benefits of Making Extra Mortgage Payments

You can shave many years off of your home mortgage when you make even a single extra payment each year. This can help you to achieve long-term financial goals, build equity and avoid paying more than necessary in interest charges. Keep in mind that any principal that is removed from the outstanding balance now will not generate interest charges going forward. This can have a snowball effect on your home equity, and this is especially true when you make extra payments on a regular basis.

Why Extra Payments Are Not Always the Best Option

Clearly, there are some great benefits associated with making extra payments on your home mortgage. However, there are also some downsides to consider before you take this step. Your home mortgage may be one of your debts with the lowest interest rate.

For example, many mortgage interest rates today are below five percent while some credit card rates may exceed 15 or 18 percent. Over the long-term, you may benefit more from savings on interest charges by reducing higher interest rate debts. Even if you have no other debts besides your home mortgage payment, you may be able to invest the money for a higher return than the interest rate on the mortgage.

Each person has different short and long term goals as well as a different financial situation to consider. With how low mortgage rates are today, however, many will benefit from paying off high interest rate debts and making smart investment decisions with any extra money they have.

When you apply for a new mortgage, your lender may ask if you want to set up monthly payments or bi-weekly payments. At one time, monthly payments were common, but bi-weekly payments are increasing in popularity. This is because they break a large expense up into two smaller and seemingly more manageable payments. In addition, you can also make what equates to a full extra payment on the mortgage each year with a bi-weekly payment structure. Before you decide which is best for you, consider a few factors.

Your Personal Budget

Many people may believe that if they get paid every two weeks, a bi-weekly mortgage payment is a better option than a monthly mortgage payment. This is not always the case. You should consider other sources of income and how much your payment is in relation to your paychecks. In addition, consider which part of the month your other regular bills are due. This is critical to establishing the best payment plan for you.

Control Over the Payments

You can still enjoy the benefit of making an extra payment per year with a monthly mortgage payment schedule. For example, you would simply need to pay $100 per month more each payment to realize the same results. When you establish a bi-weekly payment plan, this extra payment is automatic. This may be ideal if you do not think you would stick with paying more per month on your own. However, if you want more control over your monthly payment amount and when you make the extra payment, it may be best to choose a monthly mortgage payment.

The Financial Obligation

A final factor to consider is the financial obligation. When you set up bi-weekly payments, your total amount paid per month will be higher. This means that your total financial obligation will be higher than if you had a monthly payment plan. This financial obligation may impact your ability to qualify for other loans or to achieve other goals.

If you want to pay your mortgage off early, you can choose to make an extra small payment with each monthly payment or set up a bi-weekly payment plan. While each will give you the same overall result over the course of the long term, one option may be preferred for your financial situation. Consider the pros and cons of each option carefully to make a better decision for your financial circumstances.