Should You Pre-Pay Your Mortgage?

As with most things in the financial world, the answer to this question is not a simple one. There is not one piece of advice that should be given to everyone. Instead, there are several factors that should be taken into consideration when deciding whether you should pre-pay your mortgage.

Why It’s a Good Idea
You can pay off your mortgage loan early by making extra payments throughout the year, or paying more than the minimum amount on each payment. The best reason for doing this is that it can greatly reduce the amount of interest you have to pay. Some economists estimate that by adding just $25 to each required payment on a $140,000 loan, you will save over $16,668 in interest costs (! Another advantage is that you will have the loan paid off sooner, leaving you with one less source of debt and one less monthly payment to worry about. Also, the more of your mortgage that you pay off, the more equity you will have in your real estate, possibly opening up other opportunities that you might not have had otherwise - home improvement projects, for example.

When It Might Not Be the Best Option
There are certain situations where it might be prudent to use your extra money in places other than early mortgage payments. Mortgage loans, as compared to auto loans, home equity loans, and credit cards, usually have the lowest interest rates. Therefore, if you can only afford to make early payments on one of these at a time, it is best to pay off the loans with the highest interest rates first. So, before automatically using your extra money to make early payments on your mortgage, you should instead look first to get out of credit card debt, and then pay down your home equity loan, then your auto loan, and finally your mortgage.

Another consideration to make is to compare the interest rates on your mortgage loan with those of a high-yield savings account, such as a certificate of deposit. If you are able to find a savings account with a yield that is much higher than the interest you are paying on your mortgage, then it might be wiser to take the money that you would be using to make extra payments, and put it instead into the savings account.

Since there are so many factors and different situations to consider while trying to answer this question, remember that the most important thing is to do your research, comparing mortgage rates and calculating savings. After closely examining your financial situation and all the options available to you, you will be able to make the best decision for your unique situation, and you will know whether or not you should pre-pay your mortgage.

Source: Informa Research Services