If you have recently purchased a house, you have probably taken a look at your mortgage statement and noticed that the majority of your first few payments are going toward interest. You do not start paying down a significant amount of the principal until later in your mortgage cycle. If you start to make more money, you might be interested in making additional payments toward the principal of your home. Is this a smart financial move? There are a few important points to know.
You Can Cancel Your PMI Sooner
One of the major advantages of making additional mortgage payments toward the principal is that you can get rid of your private mortgage insurance sooner. If you put less than 20 percent down on your home, you might be required to purchase mortgage insurance. You will need to keep paying for mortgage insurance until you reach 20 percent equity. If you want to get rid of your PMI more quickly, you may want to make additional payments to get to that 20 percent mark sooner.
You Save Money On Interest
Of course, one of the biggest advantages of making additional mortgage payments towards your principal is that you will not have to pay as much money in interest. Interest is calculated as a percentage of the remaining balance of your loan. If you make extra mortgage payments, you can shrink the remaining balance, helping you save money on interest.
You Could Make More Money Elsewhere
On the other hand, you may not want to make additional mortgage payments if you can use your money to make more money elsewhere. If you have a very low-interest rate on your mortgage, you might be better off putting your money in the stock market, where you can generate a greater return. Of course, the stock market is also a very volatile place, so you need to be careful about how you invest your money.
It Depends On Your Goals
In the end, you need to think about your financial goals to figure out where your money would serve you best. If you have extra money to put toward your mortgage, you could pay off your house more quickly. Or, you could put it in a retirement account. Think carefully about what works best for you.
If you want to purchase a house, you will probably have to take out a mortgage. There are only a few people who have enough cash to purchase a house outright, so most will go to the bank for a loan. How do you know if the bank is giving you the best possible interest rate? Unfortunately, the bank does not always give you the best interest rate because the bank is looking for a way to make money. If they can get you to accept a higher interest rate, they will make more money on your home loan. What are some of the factors that dictate interest rates on loans, and how can you say money?
