Like with most financial decisions, deciding whether it is wise to pre-pay your mortgage is not simple. There really isn’t one solid piece of advice that applies to everyone. Rather, there are a number of factors that should be considered when you are trying to decide whether you should pre-pay your mortgage or not.
Why pre-paying your mortgage is a good idea
If you want to pay off your mortgage loan early, all you need to do is to start making extra payments throughout the year. Or you can pay more than what your minimum payment is. The best reason for making extra payments or paying a lump sum against your mortgage annually is to save significantly on the amount of interest you pay on your mortgage. Some financial experts estimate that by paying just an extra $25 on each of your mortgage payments you can save significantly. For example, on a $140,000 loan, you will save more than $16,668 in interest. Another advantage is that your mortgage will be paid off much sooner, and that means one less debt and one less monthly payment for you. In addition, the more of your mortgage is paid off, the more equity you have in your house, which can open up other opportunities that you may have not had otherwise.
Why pre-paying your mortgage might be a bad idea
In some situations, it might be reasonable to use any extra money you have on other things rather than on your mortgage payments. Mortgage loans generally have a much lower interest rate than auto loans, credit cards, home equity loans, etc. Therefore, it would be better to first pay off these loans with the highest interest rates. So, before you automatically pay additional money for your mortgage, you should first aim to get rid of your credit card debt, working from highest interest to lowest interest.
Another consideration for you is to compare your high-yield savings account with the interest rate on your mortgage loan. If you can find a savings account with a higher yield than your mortgage interest, it might be smarter for you to take the money and put it into the savings account instead of making extra payments on your mortgage.
There are many factors and various scenarios to think about while you are trying to answer the question whether it’s better to pre-pay your mortgage or not. The most important thing is to do your research, calculate your savings, and compare interest rates. After you look closely at your financial situation and the many options available, you will then be able to make the best decision for your situation.