When you have multiple debts secured by your home, these mortgages are arranged by the lienholders' priority for getting repaid. In most cases, your primary mortgage will be the large one that you got when you purchased the home. Your secondary mortgage will probably be a home equity loan or line of credit. You can pay off the mortgages in whatever order you prefer.
Mortgage Priority
The mortgage priority refers only to the order in which the lienholders get their money back if you fail to make payments, not the order in which you have to pay them off. For example, say you have a primary mortgage of $100,000 and a secondary mortgage of a home equity line of credit of $50,000. If your home goes into foreclosure and the lender sells it for $120,000, the primary lender will get the full $100,000 and the secondary lender will only get the remaining $20,000. This is why secondary mortgages usually have higher interest rates than primary ones.
Choosing Payoff Order
The order in which you choose to pay off your mortgages depends your goals. If you are looking to save money on interest, you probably want to pay the mortgage with a higher interest rate first. However, if the one with a lower interest rate has a variable rate that is trending upward, you might want to pay it off first so you can get rid of it before the interest rate gets really high. If one of the mortgages has a much smaller balance than the other, you might want to pay that off first to get the satisfaction of paying off a debt and having one less monthly payment.
Pay Mortgage With HELOC
Some homeowners choose to pay off a primary mortgage with a home equity line of credit (HELOC). This might be because the variable interest rate on the HELOC is currently less than the rate on the primary mortgage. Others use the HELOC basically like a checking account and deposit their paychecks into it and make withdrawals when needed. This ensures that all extra money each month goes toward paying off the house.
Considerations
Before rushing to pay off either mortgage, consider whether this is the wisest way to use your money. Most mortgages have lower interest rates than other types of consumer debt, such as credit cards, so you should probably pay those off first. In addition, between the low interest rates and tax deductions on mortgage interest, many people can earn more by investing the money than they save on mortgage interest.
0 comments:
Post a Comment