When considering financial planning, many people consider whether or not it is a wise idea to pre-pay mortgage payments. Paying down your principle by prepaying mortgage payments can subtract several years from the time it takes you to own your home free and clear, and can save you thousands of dollars in interest. However, pre-paying a mortgage is not the best idea for everyone and there are several pro’s and cons to consider before deciding to pre-pay mortgage payments.
Reasons to Pre-Pay Mortgage Payments
The biggest reason to pre-pay mortgage payments is to become debt free. If you value the security of owning your home free and clear, it may be a wise idea for you to pre-pay mortgage payments. Once you eliminate your mortgage debt, you have more financial freedom to invest in other endeavors, or even to take risks such as branching out and starting your own business or leaving a job you hate, since you will be relieved of your obligation to pay a monthly mortgage payment.
When you pre-pay mortgage payments, you will also save money in interest. While this is certainly an incentive, some people argue that this is not a good reason to prepay a mortgage since often you could earn more in interest by investing the money elsewhere than you are paying in mortgage interest.
Reasons not to Pre-Pay Mortgage Payments
There are several big arguments against pre-paying mortgage payments. Many people do not want to pre-pay mortgage payments because they don’t want to lose the tax deduction they get on mortgage interest payments. This may be a valid reason not to pre-pay your mortgage, however you can only deduct interest and not principle payments and thus this incentive decreases as your mortgage term progresses and your monthly payments consist more of principle than interest.
The other major argument against pre-paying your mortgage is that you can invest your money elsewhere to get a higher rate of return. For example, if you are being charged 6.5 percent interest on your mortgage but can invest in an investment that pays 8 percent, it would not be financially advantageous to pre-pay mortgage payments. However, remember that when you have paid off your mortgage you are guaranteed the return on that investment equal to the interest you save. Any other investments that are more speculative may carry more of a risk, and as such the additional money earned comes at the cost of taking more of a chance with your money.
Finally, if you do not intend to stay in your home long term, it may not make sense to pre-pay mortgage payments, especially if you are paying a relatively low interest rate on your mortgage.
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