Monday mortgage Q&A for a slow day: “Which mortgage should I pay off first?”
If you have multiple mortgages, such as a first and second mortgage tied to the same property, paying down the loan with the higher interest rate is generally advised.
For example, if you’ve got a first mortgage at 6% and a second mortgage at 12%, it’d probably be in your best interest to knock out that second sooner rather than later.
That means extra payments on the second mortgage if you’ve got the money handy (assuming you actually wish to pay down your mortgage).
These days you have to question whether borrowers actually want to pay off the second mortgage, as many are underwater and may default intentionally.
Anyways, imagine if you’ve got an interest-only option on your first mortgage and a second mortgage with a higher interest rate.
You may want to make interest-only payments on the first mortgage so you can allocate as much as possible to paying down the principal on that costly second mortgage.
Even though you’re not chipping away on your first mortgage, you’re eliminating more of the high-cost debt tied to the second mortgage.
Also consider that you may be able to whittle down the second mortgage enough to the point where it could be paid off completely or refinanced with the first mortgage into a single, lower rate mortgage.
Of course, it may not always be wise to make larger payments than necessary on your mortgage(s).
If you’ve got credit card debt at 18% APR, you’ll probably want to pay that off before making extra payments on your mortgage(s), which carries a relatively low interest rate.
Some homeowners seem to want to pay down the mortgage as quickly as possible while racking up thousands in finance charges on their credit cards, despite the fact that mortgage interest is tax deductible and credit card interest is not.
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