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Should you use any extra cash to pay down your mortgage?

If you have debt in addition to your mortgage, it’s smart to pay that off before paying down your mortgage, a mortgage expert says. (iStock)

While many Americans continue to struggle from the pandemic-related economic downturn and job losses, those who can work remotely have found some bonus money in their pockets. The reduction of spending on travel, commuting costs, dining out and entertainment has improved the balance sheet for many people.

“If you have some extra cash on hand and are considering paying down your mortgage, it’s a good idea to first look at your overall financial picture and goals and consider how best to put that extra money to work for you,” says Balenda Hetzel, a regional production manager for Inlanta Mortgage in Destin, Fla.

Since mortgage debt is normally the largest debt most people hold, homeowners are likely at some point to ponder whether they should try to pay off their loan faster, says Dave Cook, a loan officer at Cherry Creek Mortgage in Denver.

“My clients ask often if they should pay down their mortgage, so the first thing I ask them is ‘Do you have six months of expenses saved for an emergency?’ ” Cook says.

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According to a study of 2,000 Americans by, 56 percent of Americans have $5,000 or less in savings, while a third have $1,000 or less.

Hetzel says that most experts recommend having six to nine months of income saved in an emergency fund.

How to use extra cash

Once your emergency savings account is funded, Cook suggests making sure you have contributed the maximum to your 401(k) to gain the advantage of investing pretax dollars and possibly an employer match.

If you have debt in addition to your mortgage, it’s smart to pay that off before paying down your mortgage, Hetzel says. She recommends prioritizing high-interest credit cards and then other debt with a higher interest rate than your mortgage, such as car loans, student loans and a home equity line of credit or home equity loan.

“An advantage of paying this debt off first is that typically your mortgage interest is tax deductible, while other interest is not, which can be a benefit when filing your taxes,” Hetzel says. “Be sure to talk to a tax expert first about this.”

If you don’t have debt outside your mortgage, Cook suggests comparing the interest you’re paying on your mortgage with the potential earning from investing the cash.

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“There’s a potential to earn a higher return on your money in your 401(k), a money market fund or other retirement account than you would save by paying off your mortgage early,” Hetzel says.

It’s important to look at your mortgage rates and term in the context of your cash flow, Hetzel says, because you may want to refinance into a shorter-term loan to accelerate your payoff date and pay less interest overall. However, you need to calculate the costs of a refinance to see how long it will take for the savings to recoup your costs.

“If you’ve paid off your other debt, are contributing to your retirement fund and still have extra cash, paying more on your mortgage might be a good idea,” Hetzel says. “Whether you should pay a lump sum or make extra payments every month will depend on how many years are left on your mortgage.”

Hetzel also recommends considering whether most of your monthly payments are going to principal or to interest. The nearer you are to the end of your loan, more of your payment goes to the principal. If you do pay extra on your mortgage, be sure to designate it as a principal reduction payment.

“There is no one right answer for everyone, but for many people we have been able to show them the benefits of taking the extra money they have and investing it versus paying down their loan down faster,” Cook says. “Before you do anything, consult with a mortgage professional and a financial adviser and have them walk you through your options.”

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