Paying Down the Mortgage Debt Vs. Assuming a New Mortgage
by Nicole Canfora
A mortgage is a large debt often repaid over a long period of time.
Buying a home or property usually involves taking out a mortgage. Certain experts believe there are both financial and psychological benefits to paying down mortgage debt, while others champion the advantages associated with assuming a new mortgage at a lower interest rate. It's important to gauge the consequences associated with each option before deciding which is best for your financial situation.
Paying Down the Mortgage Debt: Pros
Paying down mortgage debt is ideal if you want to accelerate mortgage amortization and reduce the interest paid over the life of the loan. How much you save depends on how much you put toward principal repayment. The more money put toward the principal on a mortgage loan, the sooner the mortgage will be paid off. This approach also benefits homeowners who want to get rid of mortgage debt before or at their planned time of retirement. Paying down mortgage debt eventually eliminates private mortgage insurance, as well.
Paying Down the Mortgage Debt: Cons
If you choose to
pay down existing mortgage debt, there could be tax consequences, such as a reduction or loss of the mortgage interest deduction when filing federal tax returns. Also, the cash you would use to pay down the mortgage may be of better use for paying down higher-interest debts. For example, if you have a mortgage at 5 percent interest and debt on a credit card charging 14 percent interest, it makes more sense to put your extra cash toward the debt with the higher interest rate. The same goes for if you can invest the extra money to garner better returns on higher interest bearing accounts.
Assuming a New Mortgage: Pros
Homeowners who refinance their current mortgage and assume a new one do so because they want to shorten the mortgage term and/or lower their payments. Reduced mortgage payments result in increased cash flow, making it easier to invest, save money, or apply the cash toward other needs. Assuming a new mortgage with a shorter term may increase the mortgage payment but decrease the total interest paid over the life of the loan.
Assuming a New Mortgage: ConsSource: homeguides.sfgate.com