From a purely financial standpoint, it makes more sense to overpay the mortgage with the higher interest rate. When you factor in other considerations such as risk management and peace of mind; however, we usually recommend that you overpay the mortgage on your primary residence first.
In short, overpaying the loan with the higher mortgage rate offers the greatest financial benefit because you reduce your total interest cost more. The higher your mortgage rate, the more money you save by overpaying and shortening the length of your loan.
On the other hand, paying off the mortgage on your home offers both financial and intangible benefits. The sooner you pay off the mortgage on your primary residence, the sooner you can start making that payment to yourself.
Plus, paying off the mortgage on your home should enable you to better manage unforeseen financial challenge. Simply put, you rarely go wrong when you pay down the mortgage on your home and potentially eliminate your monthly payment.
Use ourMORTGAGE ACCELERATION CALCULATORto determine the financial impact of overpaying your loan
You should also consider the tax consequences of paying off a mortgage early. While the interest expense for the mortgage on your primary residence is tax deductible (for loan amounts up to $750,000), the interest expense for the mortgage on an investment property is deductible against any rental income.
Depending on your personal tax bracket, interest expense and the cash flow characteristics of the investment property, it may make more sense to pay down the mortgage on your home. Although this approach reduces the benefit of the mortgage tax deduction, you may receive a greater benefit by using the investment property mortgage interest to offset your rental income.
We recommend that you consult a tax advisor or accountant to review the tax consequences of overpaying different types of mortgages. This information can be an important input in your decision-making process.
Finally, it can be a helpful exercise to think about which property you would keep if you could only choose one. For most people, that is their primary home but that is ultimately a personal decision.
It typically makes more sense to overpay the mortgage on the home you would keep because this improves your ability to retain the property if you experience financial hardship in the future. Although this is a worst case scenario, it is important to understand which property holds greater value to you.
In closing, the decision on which mortgage to overpay involves both financial and personal considerations. We recommend that you weigh the pros and cons of each option and then evaluate different scenarios to determine plan that is right for you.