August 4th, 2015 2:42 PM by Jackie A. Graves, President
Having debt, even “good” debt like a mortgage, can be a major
stress in your life. It can be especially frustrating when you see how much of
your hard-earned cash is going to pay off interest on your loan and not the
home’s principal cost. You could end up paying as much as double your home’s
sticker price over the term of your loan.
Prepaying your mortgage can help you keep money in your
By paying more money monthly, you can cut down on the interest
you owe, get your home paid off sooner, and build equity faster. It can even
help you reach retirement sooner. But before you jump on board, it’s important
to carefully assess your financial situation and understand the basics of
How to prepay
First, it’s important to know the interest rate and
remaining balance on your mortgage. Then, decide how much you want to (and are
able to) prepay. You can contribute a lump sum to cut down the overall cost if
you have received an inheritance, bonus, or other windfall. You can also add a
few dollars to each payment, make an extra (13th) annual payment, or
some combination of these options.
Next, make sure that your mortgage allows you to prepay and that
it doesn’t include a prepayment penalty. Then, contact your bank or mortgage
company and verify that all extra contributions will be applied directly
to the principal. You can then automate this larger or additional payment
so you can stay on track without having to do so manually.
Difference between refinancing and prepaying
Prepaying may seem similar to refinancing your mortgage, as both
can help you pay off your mortgage faster. Refinancing, however, requires getting an
all-new mortgage with new terms and paying closing costs again. You will also
need to go through a credit check again, and if you haven’t been paying close attention to your scores and
they are low, that could be problematic for you. (You can see where your credit scores stand for free on Credit.com.)
Refinancing is generally done to reduce your interest rate,
reduce payments, or reduce the risk of future rate increases. It’s important to
calculate the point when monthly savings of the new mortgage become greater
than the upfront costs of the refinancing process.
The prepayment decision, by contrast, is more of an investment
decision. You should consider your aversion to risk and whether prepaying your
home or putting those funds into CDs or bonds will earn better yields. This
includes both the better option financially and emotionally, since some people
sleep better at night being debt-free.
So, should I do it?
Deciding to make prepayments on your mortgage is a personal
financial issue. Prepaying reduces mortgage interest, which is tax deductible
and may not be a smart move depending on your tax situation. It’s also
important to consider if your return on investment might be higher elsewhere.
As with any other large financial decision, you should be assessing your
Getting rid of higher-interest debt (like from a credit card or private student loan) may be a smarter
decision than making mortgage prepayments. It’s a good idea to make sure you
are contributing enough to your retirement savings plans to ensure you are on track for a
comfortable retirement before pooling extra funds to finance your home.
Prepaying has the potential to save you thousands of dollars in interest, but
it isn’t right for everyone (you can check out your lifetime cost of debt here).
It’s important to weigh the pros and cons carefully.
This article was written by AJ Smith and originally published on Credit.com.
To view the original article click here