The Pros and Cons of Prepaying Your Mortgage
So you are thinking I have some extra money this month, should I pay a little extra on my mortgage. Maybe you always send an extra $100 a month with your mortgage.
Give this article a read and see if it makes sense for you.
- Unless you are going to keep your home for at least 10 years, prepaying principal won’t result in much total interest savings. The reason, extra principal payments shorten the life of the mortgage and the savings come at the end, in the last few years.
- Prepaying will leave the borrow with less cash available for other purposes. It is often smart to not prepay a large lump some because you can’t easily get that money back if you need it for an emergency later. An exception to that rule is if you are paying down a HELOC (or Home Equity Line of Credit) where you will have access to that money again for emergency use. Should you have paid down your mortgage and you need cash, you will have to qualify for a new loan against your property. And when you need it most you will likely not qualify, or at much less appealing terms than you have right now. Should that money be invested in the bank you still have it available.
- If your existing mortgage has only a few years remaining, such as the 11th year of a 15 year mortgage, or the 22nd. year of a 30 year. Reason being most of the current payment goes to paying principal and very little is interest.
Don’t worry about losing the income tax deduction savings on your mortgage. To worry about it is a tad silly. Let’s say you are in a 28% tax bracket. So for each $100 in interest you pay, you save $28 in taxes, you are still out $72 in taxes.
- By investing the money you were going to pay extra on your principal you can gain the benefit of equity multiplication. Once you pay it in to your house, it only pays off the principal, it never gets interest. Now lets say you were to invest that same money, you will compound your returns each year as you get interest on your interest and interest on that interest and so on. Should at a later date you want to pay down the mortgage you will have the cash to do so (and the interest it has earned along the way).
If you do prepay your mortgage and your loan has PMI and you’ve paid your loan down below 78 percent of it’s original balance, remember to make sure the lender cancels your PMI premiums. Also if you have paid down the loan to a current loan to value ratio of 80%, most lenders will allow you to cancel your PMI premiums with an appraisal (that you pay for). Not all loans allow for PMI cancellation, and you may not be eligible based on your credit, or payment history.
The biggest reason that people prepay their mortgage is the psychic value of owning their property free and clear. It is a reason to prepay your mortgage that may trump all others, it may not get you there the fastest or with the most money, but it may just make you feel good, nothing wrong with that. Just think about the other options before your make your decision.
Technorati Tags: prepay mortgage, equity multiplcation
powered by performancing firefox
