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Should you pay off your mortgage early?

August 15th, 2012

If you’re one of the lucky Americans who pays their bills on time and still has extra money to spare, you may consider paying down your mortgage early.

Which leads to a popular question: If you can afford to pay off your mortgage early, should you?

As Justin McHood states in his post, “Paying Down Your Mortgage Wisely,” it’s really up to you, and it’s more about personal preference than right or wrong.

First, you should check if your lender has a prepayment penalty. If it does, you should of course skip the extra or early payments.

If it doesn’t, here are some questions McHood thinks you should consider:

  • Does your employer match any retirement funds you save? If so, put that extra money into retirement. You will yield much more money that way.
  • Do you have any debt other than your mortgage? If so, what is the interest rate on the debt? Always pay the highest interest rate first.
  • Do you have at least 24 months of living expenses in liquid assets? If not, your extra money should go into a savings account for emergencies.
  • Do you currently owe more on your mortgage than your home is worth? You may consider extra payments if that is the case.
  • Does the amount of your mortgage bother you?
  • Do you think you could get a better return on your money if you invested it in other things?

If you decide you want to make early payments, consider biweekly, rather than monthly. You will end up making one extra payment per year, which will cut the life of your loan.

Or, if you don’t want to commit to biweekly payments, you can make early or extra principal payments – which go towards the base amount of your loan minus interest.

McHood offers some good advice for principal payments: The sooner, the better.

Say you inherit $20,000 and you want to use the money towards your mortgage. If you put that $20,000 toward your $200,000 mortgage in January, you would be paying interest on $180,000. But if you waited until December, you would be paying interest on $200,000 for those 11 months.

McHood explains,

“Faster is better” when making extra principal payments because the monthly interest expense on a mortgage is calculated on the loan balance, so the sooner you can get a lower loan balance, the lower your monthly interest expenses will be.

Acadia Lending Group LLC

190 Riverside Street Unit 4B
Portland , Maine 04103

Phone: 207-899-4500

Fax: 207-899-4503

NMLS: 370636

 

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