Should you keep prepaying an underwater mortgage?
Q1: Extra mortgage payments while underwater
Is it worth it to pay extra on your mortgage when you are considerably underwater in your house? I don’t want to loose my house but I am also not sure if this makes sense.
- Lisa
Unless you are planning on walking away from the mortgage and the house, it makes just as much sense to pay ahead on an underwater mortgage as it does on an above-water mortgage. If you were doing it before then you should probably continue.
In either case, you owe a certain amount of money to a lender. Each day (that’s how it’s often calculated), you’re charged some small amount of interest on that loan. So, if you have a 5% loan, each day you’re charged (5/365)% interest in your remaining balance – about 0.014%. If you have a $200,000 balance, that’s $27.40 a day, which adds up to $821.92 over a month. If you make an extra payment of, say, $5,000, you drop the daily interest down to $26.71 and the monthly amount down to $801.37. How does that help you? Your next house payment (and every one thereafter) will have $20 more go towards the balance of your home and $20 less go into the bank’s pocket in the form of interest. You’ll pay off the house quicker because eventually that extra $20 a month will add up to eliminating payments at the end of your mortgage.
Now, why would it not be a good choice to pay ahead? There’s always a small amount of risk when you pay extra on collateralized debt without paying it off, whether you’re paying ahead or not. You weren’t required to pay that money, and if things fall apart later on and the house is foreclosed upon, you’ve simply lost those extra payments. Of course, this is only a significant concern if you’re in a house where you’re struggling to make the basic payments – if you’re financially secure enough to handle the payments and an extra monthly payment, then this isn’t much of a risk.
I consider that risk small enough for almost everyone that the financial gains of paying ahead blow it out of the water. So, unless you’re going to walk away, I’d pay ahead when I could (unless you have other debt that has a higher interest rate, of course).
