Should I Prepay My Mortgage?

Should I Prepay My Mortgage?

Benefits of Prepayment

The main benefit of paying off your mortgage early is the savings. Even by cutting off just a few years from your home loan, you can save thousands of dollars in interest. For example, if you take out a 30-year mortgage loan for $250,000 at 4%, you would pay more than $179,000 in interest over the course of the loan. If you were to contribute an extra $75 a month, you would pay off your home loan three years early and save almost $22,000 in interest payments. And the savings only increase if you can throw larger chunks of change at the mortgage.

Prepaying your home loan is also a way to invest in something with an almost guaranteed return. House values generally rise over long periods of time, earning homeowners extra equity that can be turned into cash now or in the future.

Beyond the financial benefits, prepaying your mortgage to own your home earlier can also provide a psychological boost. Many people love the feeling of being debt-free, having the peace of mind of owning a valuable, tangible asset.

Prepaying Vs. Refinancing

If your goal is to save money in the short term, refinancing your home loan may be a better option than prepaying. Especially in today’s ultra-low interest rate climate, refinancing can often save homeowners hundreds of dollars a month in payments and still save thousands in interest over the life of the mortgage. If you are able to afford the payments for a shorter loan term, like a 15-year fixed-rate, the interest rates are usually much lower, allowing you to save even more in the long run. If today’s rates are much lower than when you originally got your loan, your new payment may not even be much higher than your current one. 

Prepaying Vs. Investing

Of course, there are opportunity tradeoffs to prepaying your mortgage. That extra money that you throw towards the loan could instead be used to invest in other ways to earn you money. You may want to consider things like contributing more to your 401(k) to get the full match from your employer or adding to your stock portfolio. Perhaps you might want to buy other real estate for income-potential. And if you have other existing debt, like credit cards, auto loans or business debt, it is best to pay those off first.

How To Prepay Your Mortgage

If you decide, that now is the best time to pay down your mortgage quickly, you have several options. You could simply include extra money on your monthly mortgage payment. If you get a yearly windfall such as a bonus or tax refund, you could make a lump sum payment. You could also choose to make bi-weekly payments. That involves splitting your monthly total into two and making a payment every two weeks. It will work out to 13 monthly payments a year and you may not feel the increase much in your budget.

Some loans come with prepayment penalties; you should check with your lender for the rules of your loan. Once you figure out the details, paying your home loan off early can be an excellent goal with huge financial rewards.