Classic advice for handling any amount of debt — mortgages, credit cards, etc. — is to pay more each month than is actually required. For instance, if I had a monthly credit card bill of $100, but I had an outstanding balance of $10,000, with 10% interest, it would take me 213 months (or 17 years and 9 months to pay off that card). But if I could make payments of $200 each month, the length of time I’d be making payments drops to 65 months (or 5 years and 5 months), and if I could kick it up to $500, I would be out of debt in 22 months — less than 2 years. While the numbers for the credit card balance and payments are made up, the math isn’t. You can use BankRate’s credit card calculator to figure the numbers for your own situation.
A lot of people suggest handling a mortgage in exactly the same way. Any payment you make beyond your monthly required payment goes directly towards the principal amount of the mortgage — meaning that you’re not paying off extra interest, and will, in the long run, save you money.
But there are some drawbacks to prepaying a mortgage in this fashion, and even to paying off debt quickly, depending on your interest rates. There’s no question that you should at least make the minimum payments each month, but there may be ways to take better advantage of other money.
Do you have a 401(k)? Depending on the interest on your debt, you may actually come out ahead in the long run if you can invest your money in a retirement account. You’ll have to run the numbers for yourself, but if your employer matches the money you invest in your 401(k), there is almost no reason that should convince you to not invest up to the matching limit. While prepaying your mortgage can save you money on interest, your employer is essentially offering you free money that you cannot get any other way if one of your benefits is a 401(k) matching program! And who wants to turn down free money?
You might also decide against making extra payments on any debt if those extra payments could put you in danger of building up more debt. If you have no cushion of cash, no emergency savings, you can put yourself in danger of racking up more debt if something unexpected happens. Having the money to deal with emergencies should take precedence over paying off debt quickly. However, if you can place the money you were planning to direct towards your mortgage or credit cards into savings and build up a decent emergency fund, there is no reason that you can’t start up those extra payments after you’ve built up a healthy cushion.
