How to Decide If You Should Prepay Your Mortgage Loan

Should you prepay your mortgage? Base your decision on the circumstances of your financial position and the terms of your mortgage.

Difficulty: Easy

Instructions

Steps to Determining If You Should Prepay Your Mortgage

1. Find out if your mortgage allows prepayment. Some mortgages penalize you for prepaying. Read through your mortgage documents to make sure you can prepay without a fee.

2. Can you afford to prepay your mortgage? To do this, subtract from your monthly income your regular bills. If you have any money left over, you can afford to add a little extra to your monthly mortgage payment. If you don't, you can't afford to prepay your mortgage.

3. Calculate how much you could add to your mortgage payment. Consider periodic bills and purchases you may need to make. Are there other savings and investment options that are available to you?

4. How much money could you save by prepaying? For example, if you add $50 a month to a $200,000 mortgage that's amortized over 30 years at 6 percent you would save about $28,300. After figuring in the loss of a tax benefit, someone in the 28 percent tax bracket would make a return rate of about 4.4 percent.

5. Determine if the savings will be worth more than investing your prepayment amount. Using the example above, that person would be better off investing in a money market account generating 5 percent interest.

6. Is prepayment the best investment for your situation? If you plan on living in your home indefinitely, prepayment may be smart. However, if you plan on selling in a couple of years, prepayment doesn't make any sense. Use your extra money for some another investment. Consider adding to the value to your home instead.

Tips & Warnings

• There are calculators available online to determine how much money you can save by prepaying.
• Find those online mortgage calculators, and other tools, by conducting a keyword search for "mortgage prepayment calculator."
• With interest rates low, it is probably a better investment to use extra money to add to your property's value.
• Some mortgages enforce large prepayment penalties.
• Don't prepay your mortgage if you will be penalized.
• Don't sign a mortgage unless you understand the prepayment restrictions.