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Should You Overpay Your Mortgage or Make a Lump Sum Payment?

Making extra payments on your mortgage can be a great way to reduce the amount of interest you pay and build up your home equity. Depending on the amount, you can also request a recast and change your monthly payment depending on the new balance. But is it better to overpay your mortgage or make a lump sum payment?Overpaying your mortgage has several potential benefits. Not only will the amount of principal be reduced, but also the amount of interest you will have to pay over the term of the mortgage.

This is especially true if you apply soon after applying for a new mortgage. Additionally, if you have other debt that charges a higher interest rate than your mortgage, this is probably a good strategy. You can generally overpay up to 10% of your mortgage debt before facing additional charges if you have a current mortgage agreement. On the other hand, making a lump sum payment isn't your only option if you're lucky enough to have extra money. Those who oppose overpaying a mortgage argue that money that would otherwise be trapped in a mortgage loan could be used to generate more money in the short and long term through investments that generate greater returns.

It's important to consider both options carefully and weigh the risks and rewards. Before making any decisions, it's important to talk to your lender and make sure there are no prepayment penalties. Confirm that additional payments will apply to your principal balance, not interest, and check for any restrictions in your contract. Crucially, talking to your lender can help you avoid exceeding your mortgage's overpayment limits. In conclusion, paying off your mortgage provides the highest return on investment for those who plan to stay in their current homes for the long term. However, if you have a greater tolerance for risk and have significant emergency funds in the background in case your investments fail, extending your mortgage to invest your money elsewhere should also be considered.

Clifford Dalluge
Clifford Dalluge

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