Should I Prepay my Mortgage?
There are three indisputable facts about paying off your mortgage more quickly than your contract specifies.
- Perhaps most important is that paying it off early is a guaranteed way to save money -- possibly a considerable amount.
- There's also the fact that you may be able to own your home outright years sooner, freeing up years' worth of monthly payments.
- Plus, the more rapid buildup of available equity can be a huge asset in your retirement “nest egg,” and can be a ready source of funds in an emergency.
On the other hand, consider that your mortgage may be the least costly debt in your portfolio. This was true before the 2018 change to the mortgage interest 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 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 40% of homeowners 65 and older had mortgage debt on their primary residences in 2016, up from 22% in 1995, 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 may 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 four 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, have the discipline to make them on as regular a basis as you can.
- The higher the interest rate on your mortgage, the greater benefit of prepaying it. The longer the original term of your mortgage, the greater the benefit of repayment.
The type of mortgage you have can result in special considerations related to your prepayment decision. 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 also jump ahead to should I prepay my mortgage on invest instead?