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Should You Prepay Your Mortgage?

September 17, 2020

should i prepay my mortgage
Wondering should you prepay your mortgage? Figure out if you need to – and also shouldn’t – here.

Buying a home is one of the biggest investments you will make in your lifetime, but do you really want to be paying for it for the rest of your life? Your answer is probably no. If you have the means, is prepaying your mortgage a good idea?

Most of the time, it is. You will save a substantial amount of money in interest, shorten the length of the loan term, gain the equity you have in your home and own it outright sooner. But before you start writing checks to your mortgage company, there are a few things to consider to ensure that your money wouldn’t be much used everywhere: Do you have some debt? Is the retirement plan ahead? Have you got an emergency savings accounts?

If you have debt, then aren’t maxing out your retirement account contributions or don’t need in the middle six weeks to annually’s salary on your emergency fund, subsequently prepaying your mortgage isn’t something to consider just yet. But if you’re in good shape financially, consider this.

The Pros

By making just one extra mortgage payment per year, you could substantially reduce the total cost of your loan. For example, if you borrowed $100,000 on a 30-year loan at 4 percent, your monthly payment would be $477. If you make 13 payments a year instead of 12, you would save more than $10,000 in interest over the life of the loan and reduce your total loan term by four years. (You can use the calculator at Bankrate to see how it would affect your loan). And if you double your mortgage payment, you could pay off that similarly 30-year loan in only 11 years.

When you’re writing a check to the bank for the extra payment, it’s important to mark on it that you want it to be applied to the principal. If you don’t, the lender may use the excess payment to interestpaying attention beforehand doesn’t make you any equity in your house. But do your own homework. Prepayment penalties – that may be owed to a creditor for prepaying a loan in a predetermined time interval – are many less common than they had been prior to the Great Recession, however do apply in certain instances (although generally just throughout the before all else two to four decades of financing ).

The Cons

Remember that prepaying a mortgage isn’t the best option for everyone. And in addition to making sure that your other higher-interest, non-deductible debts are paid before all else and your retirement and emergency savings accounts are in order, there are a few other reasons why you might not choose to prepare your mortgage:

  • Your interest rate is extremely low. If you were lucky enough to refinance into a 30-year fixed-rate loan at 4 percent or beneath, that’s a historic interest rate. You might want to keep that rate and use your free cash for something else, like…
  • You’ve found other investments with a higher rate of return. You might decide to invest your savings in the share marketplace or another investment that has a higher rate of return over time. Or, you might decide to purchase investment property.

But if neither of these scenarios apply to you, go ahead and apply a few extra payments to your principal this year. The less time it takes you to pay off your loan, the more money you’ll save in the long run.

Own your money, own your life.