Pros and Cons of Prepaying Your Mortgage

Paying off your mortgage early could lead to a sense of financial freedom, but it’s not the right move for everyone. Consider your complete financial picture and check your lender’s policies before deciding whether to prepay your mortgage.

Reasons to Make Extra Loan Payments
Prepaying your mortgage would reduce the total amount you would spend on interest. The amount you pay in interest each month is based on the outstanding principal. Reducing the principal would lower your interest charges and could save you tens of thousands of dollars over the life of the loan.

Paying more than required could help you pay off your mortgage sooner. If you have a specific goal in mind—such as paying off your home before you retire or before your children start attending college—making extra mortgage payments now could mean greater financial security and flexibility later.

Equity is the difference between a house’s current value and the amount owed on the mortgage. Prepaying your mortgage could help you build equity faster. If necessary, you could access that money through a home equity loan or a home equity line of credit. Getting your equity up to 20 percent could also allow you to eliminate private mortgage insurance and save money each month.

Reducing your mortgage balance could improve your credit score, which is based, in large, on your total debt-to-income ratio. If you applied for a credit card, car loan or personal loan, a good credit score could help you get a low interest rate.

When Prepaying Your Mortgage Might Not Be the Best Move
If you started saving for retirement or for your children’s college education late, it might make more sense to put extra money toward those goals than to make extra mortgage payments. Money that you invested in stocks, bonds or mutual funds could substantially increase in value and help you meet your more immediate financial goals.

If you have high-interest debt, such as credit card balances, you would probably be better off focusing on those than prepaying your mortgage. Interest rates on credit cards are typically much higher than interest rates for mortgages. Eliminating your credit card debt as quickly as possible would likely save you a lot more in the long run than you would save by making extra mortgage payments.

If you don’t have an emergency fund with enough money to cover at least 3 – 6 months’ worth of expenses, focus on that first. If you lost your job or couldn’t work for medical reasons, it would be easier to withdraw money from a savings account than to borrow against your home equity.

Communicate With Your Lender
Some mortgage lenders charge a prepayment penalty. Before you make extra loan payments, contact your lender to find out if you would be charged a penalty. If you decide to make extra payments, clearly inform the lender that you want the extra funds to be applied to the principal, not to interest or escrow.