What Are the Pros and Cons of Prepaying Your Mortgage?

Posted March 12 2014
by PenFed Team
Man and woman going over paperwork with calculator and laptop

If you were to ask ten different personal finance experts whether you should prepay your mortgage, you’d probably get ten different answers. So what should you do with your mortgage?

To help you make the right decision, this article will break down the pros and cons for you.

Why prepay my mortgage?

We all know that having a lot of debt isn’t bad, but mortgage debt isn’t all bad. The interest on your mortgage is a lot lower than the interest on your credit cards and you can write some of that cost off on your taxes.

However, putting extra money into your mortgage can save you tens of thousands of dollars in interest payments over the lifetime of your loan; depending, of course, on your interest rate, the amount of your loan, and how close you are to paying it off.

Though you could get better returns on your money by investing, putting money into your mortgage is a guaranteed savings, where other types of investments could be a win, or a loss. And when you do get your mortgage paid off entirely, not only have you saved a bundle in interest, you have also cut down significantly on your monthly expenses.

Lower expenses will make it easier for you to save your money, or help your money last longer in case of an emergency, like unemployment.

Why you might not want to prepay your mortgage

Even though paying off your mortgage is generally good, there are some reasons you might not want to put more money into your mortgage right now.

What is the basic rule of thumb? Make sure your finances are in reasonable order before you start making extra mortgage payments.

  • Do you have other debt? If you’re carrying a lot of credit card debt, the interest on that can add up quickly; a lot more quickly than cutting down mortgage interest could help. Paying down pricier debt like credit cards is likely to be more important than paying down your mortgage.
  • How is your savings? The biggest problem with dumping money into your mortgage is that the funds are not liquid. It is very difficult to tap into that cash if you suddenly need the money. So before paying down your mortgage, you should make sure you have a decent emergency fund to draw from, just in case you need cash quickly.The same holds true for other types of savings—whether it is savings for retirement, college, or a new car. If you have other savings goals, be sure you’re making progress towards those goals before putting money into your home.
  • Would you rather invest? Savvy investors can get better returns on their money by investing it in something other than their home. If you are not sure of your investing skills, putting money in your home is a safe bet.
  • What about my tax write-off?* Homeowners enjoy some tax breaks, including being able to write off a portion of their interest paid. If you pay off your home, yes, you are going to lose that write-off. However, the money you will save by not paying that interest is going to outweigh the tax write-off. Do the math and decide whether you’d rather have the write-off, or if you would rather not have to pay that interest in the first place.
  • Do you have prepayment fees? Your mortgage may have extra fees tacked on for prepayment; though depending on how much you might save, they could be worth paying.Once again, be sure to do the math first before you decide to pay off your mortgage.

How do I prepay my mortgage?

Prepaying your mortgage doesn’t mean shelling out a lot of cash immediately. You do not need to tackle the entire balance of your mortgage at once. Even adding an extra $25 to $50 dollars a month to your payment can help get your home paid off sooner. This, in turn, means you will be paying your lender less in interest later down the road.

This can be as easy as just making your monthly payment a bit bigger or sending in an extra payment on whatever payment schedule you prefer. Be sure to talk to your financial institution to find out if there is any special process to go through.

The takeaway?

Remember, prepaying your mortgage doesn’t have to be an all or nothing situation.

You can always put some money into paying off your mortgage sooner, some money into savings, and some into investments—depending upon what makes the most financial sense to you.

*Consult your tax advisor

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