Extra Florida Mortgage Payments: A Smart Move?

With mortgage rates rising across the country, and expected to continue that pattern for all of 2006, is it still a wise decision to pay your mortgage off early by contributing a little extra to your bill each month? Jeff Brown of the Philadelphia Inquirer thinks so, but also proposes some viable alternatives in a recent column. Whatever course of action you take, it could pay off - literally - to consider your options, since even an extra $100 a month could drastically reduce your long-term debt.

Consider the following points:

• With a 6 percent, 30-year fixed-rate mortgage of $100,000, you’ll pay almost $116,000 in interest over the duration of the loan. Contribute an extra $100 each month toward paying off the principal and the interest will total just $76,000 - effectively saving you $40,000. Not only that, but you’ll be done with the payments in 9 years instead of 30.
• However, could investing $100 a month some other way net you even more?

That’s the question. If you make that extra payment, you are effectively investing in your home loan - at an interest rate locked in at 6 percent, or whatever your rate is. If you could put that $100 a month into something that paid out 10 percent annually, it would be a no-brainer. Sure, an investment could yield you a heck of a lot more. But the mortgage rate is guaranteed. Stocks and bonds are not. There are “fixed-income” options for investors, however, such as the standard U.S. Treasury bond, which currently pays about 4.5 percent. You can receive a similar rate on a five-year Certificate of Deposit, or “CD.”

Not only are those rates lower, but the bonds can lose value under a number of circumstances, making the loan payments more appealing. If you choose to go the fixed-income route, the best option is probably a government-insured bank CD. These will not lose value if markets fluctuate, and if interest rates rise, you can move your money to a new CD to capitalize. Your money will also be more flexible and accessible if you make such a deposit than if you funnel it into your mortgage loan.

Some additional points to bear in mind:

• While additional mortgage payments can be made in small, or varying sums (depending on how much you have available each month), you need a lump sum of $500 or $1,000 to get a bond or CD. There may also be stipulations regarding withdrawal.
• Extra payments can be extremely valuable if you have an adjustable-rate mortgage, as you can lower the debt that will be subject to higher interest down the line.
• Pay off debts with higher interest rates, such as credit cards, before turning attention to your mortgage.
• If you are only planning on paying this mortgage for only a few years, the extra payments won’t do a whole lot for you. Saving up for a down payment on a new home may be wiser.