You were likely able to snag a house with a lower down payment than the traditional 20% required, but that may have left you with private mortgage insurance (PMI). This type of insurance is designed to protect your mortgage lender in case you default on the loan. Typically, a homeowner who must purchase PMI is required to keep it until reaching 20% equity.
As long as your mortgage doesn’t have a prepayment penalty, you will have the option to make extra payments on a regular basis or once in a while (for example, when you have funds from a bonus or a tax refund). Paying more than the required amount can help you reach 20% equity and eliminate PMI faster.
Should You Make Extra Mortgage Payments or Focus on Other Priorities?
Putting more money toward your mortgage can help you build equity faster and eliminate the monthly burden of PMI premiums. Before you put additional funds toward your home loan, however, make sure that you’re devoting enough financial resources to your other goals.
If you’re not saving as much as you would like for retirement, you may be better off putting extra funds into a 401(k) or an IRA so they can benefit from compound interest. You may also decide that it would be better to use extra money to save for your children’s college education.
If you have high credit card balances, you may be better off paying them down than working on eliminating PMI. The amount you could save in interest charges on credit cards may be far greater than the amount you could save in PMI.
You should have an emergency fund to cope with a job loss, an unexpected medical bill or some other type of financial hardship. Your emergency fund should have enough money to cover your essential living expenses for several months. If you don’t have a substantial emergency fund, make saving for the unexpected a top priority. Once you’ve built up a reserve to get you through hard times, you can shift your focus to building home equity and eliminating PMI.
Where Should You Put Your Extra Money?
Private mortgage insurance can be expensive, and it’s understandable to want to build home equity and eliminate that additional expense as soon as possible. If you’re currently putting enough money toward your other long-term goals and have little or no credit card debt and plenty of money in an emergency fund, go ahead and put extra money toward your mortgage so you can stop paying for PMI.
If you’re not on firm financial ground in other areas, address those issues first. Once you’re in better shape, you can focus on making extra mortgage payments and getting rid of PMI.
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