There are three indisputable facts about paying off your mortgage more quickly than your contract specifies.
- Paying your mortgage off early is a guaranteed way to save money -- possibly a considerable amount.
- You may be able to own your home mortgage-free years sooner, freeing up cash flow for other worthwhile uses.
- The more rapid buildup of available equity can be a huge asset in your retirement “nest egg,” and provide a ready source of funds in an emergency.
On the other hand, consider that your mortgage may be the least costly debt you have in your portfolio. This was true before the 2018 tax code's increase in the standard deduction, and even with that change, it still may be the case. It's also true that it's possible to get a better return on your money from other, differently-performing investments, like stocks or even other kinds of bonds.
Between those, there are several possibilities and potentials, all of which should be considered as part of any financial strategy.
Mortgage prepayment philosophy
It used to be that retiring your life's largest debt was a reason to celebrate with a "mortgage burning party." Your parents (and grandparents) were most likely to treat debt like a scourge, and wanted to rid themselves of financial indenture at the earliest chance. Today, changing attitudes toward money and debt management have made this attitude seem almost quaint, as refinancing and home equity borrowing have replaced the act of holding a "lien satisfied" note from the county officer.
More than 41% of homeowners 65 and older had mortgage debt on their primary residences in 2022, up from 24% in 1989, according to the Joint Center for Housing Studies of Harvard University. Of course, having mortgage debt when you are older means that you have less equity available to tap, whether by conventional means or via a reverse mortgage or HECM. This can limit some future financial options.
But a mortgage burning party is not really obsolete. In fact, it could be the crown jewel of a structured, effective financial plan.
When is a good time to prepay my mortgage?
When prepaying your mortgage, there's no "bad" time to do it, but there are three basic tenets to understand.
- To get the maximum interest savings from your prepayment, start prepaying as early in the mortgage term as you can, as additional payments made early in your mortgage term have the greatest cumulative effect on cost.
- For most prepayment methods to give you significant results, you need to have the discipline to make prepayments on as regular a basis as you can.
- The higher the interest rate on your mortgage, the greater the benefit of prepaying it. The longer the original term of your mortgage, the greater the benefit of prepayment.
The type and term of your current mortgage can result in special considerations related to your decision to prepayment it and the choice of the best possible method for doing so. There are distinct differences between prepaying fixed-rate and adjustable rate mortgages or those with special payment options.
If you have an ARM or a loan with interest-only payments, familiarize yourself with unique aspects related to prepaying adjustable-rate mortgages (ARMs) or interest-only mortgages in our next article, Prepaying ARMs and interest-only mortgages.
If you don't have an ARM or a mortgage with I/O payments, you can jump ahead to Should I prepay my mortgage or invest instead?