Why It Makes More Sense Than Ever To Pay Down Your Mortgage

Nowadays, you can find a 5 year mortgage rate for less than 3%.  At rates this low, why would anyone decide to make extra payments on their mortgage?  After all, investing your money elsewhere will most likely earn you more than 3% over the long term.Things might not be that simple.Mortgage rates will probably increase over the next five years.  You’d be surprised how even a small increase in interest will affect your mortgage payments.  Are you prepared in 5 years to have your monthly mortgage go up by hundreds or thousands of dollars? Putting extra money on your mortgage now gives you an insurance policy against higher rates in the future. Here’s an example.Mary and Carey have a 25 year mortgage of $450,000 at a 5-year rate of 3%.  Their mortgage payments are $2,130.  In 5 years, their monthly payments could increase significantly if rates increase.

Mortgage Rate	New Payment	This is a monthly increase of
4%	$2,324	$194
5%	$2,527	$397
6%	$2,739	$609

(BMO has a great mortgage calculator if you want to figure out your own numbers.)You could deal with higher future rates by re-extending the length of your mortgage at that time (this would bring your payments down).  But is extending your mortgage desirable?  Isn’t the point to pay our mortgages off someday?  A better, more savvy way to deal with higher future mortgage rates is to pay more on your mortgage now.You may not be able to squeeze any more money from your monthly cash flow to put onto your mortgage.  If not, consider using some or all of the lump sums you receive such as tax refunds or bonuses.Paying down a 3% mortgage might not seem to make sense on the outside.  But these low rates give us an unprecedented opportunity to make big dents in our principal while saving ourselves from higher mortgage rates in the future.