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Should I Pay Down My Mortgage?

Question: I am 25, recently married and have a house that is worth $20,000 less than what I owe on it. We only plan on staying in the house for a few more years before we will be looking to move into a bigger house and start a family. Should I put my extra money into paying down my mortgage or continue to put money into savings for a down payment on a new house?

— Nathan Mitchell, Virginia Beach, Va.

Answer: If you didn’t owe more on your home than it’s worth, experts would recommend that you use the extra cash to pay off your mortgage early. This is usually the case if the tax-adjusted return is greater than the return on your next best option, say a savings account. For example, someone in the 25% federal tax bracket who has a mortgage with a 5% rate would see a 3.84% return when they prepay their mortgage.

But given your situation and the unstable housing market, there are better ways to handle this cash. Keith Gumbinger, vice president at mortgage tracking firm HSH Associates, says you’re probably better off saving the extra money rather than using it to prepay your mortgage. Here’s why: Gumbinger says you don’t need to cure your mortgage deficit right now. While you owe more on your home than it’s currently worth, that situation may change if home values pick up in your neighborhood over time. Rather than socking more of your cash into the home, wait and see if a market recovery will raise your home’s value on its own. (On a side note, if you have other debts, like credit cards or car loans, you’re better off paying that debt down fast to avoid interest payments.)

In the meanwhile, continue making the monthly payments that you owe to the lender and save the extra money you’re left with. When the time comes, you’ll have savings to use as a down payment on your next home — and, if needed, to fill in the hole on your current mortgage.

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