Should You Prepay Your Mortgage?

Let’s say you have some extra cash, maybe from a tax refund or just because you have been able to save more. Should you use that money to prepay your home mortgage loan?

Prepaying your mortgage can be tempting. For most people their mortgage is by far their largest debt and has the biggest monthly payment. It can be very satisfying to make a lump sum payment. Before you do though, here are some thoughts to keep in mind:

• Payoff higher rate debt first. Credit cards and department store cards almost always have higher interest rates than your mortgage. Pay this higher rate debt first, even if the balances and monthly payments are small. They will be paid off faster and then you can use that money for other things.
• Prepaying your mortgage does not reduce your monthly payments. It does reduce your principal balance so you will pay it off faster, but you have to continue to make your regular monthly payment.
• Understand the true saving if you do prepay. Remember, your mortgage interest is tax deductible, which you will be losing on the amount you prepay. For example, if your interest rate is 6% but you are in the 25% tax bracket, the true cost of your mortgage is only 4.5%. If you can get an investment that pays more than 4.5%, you would be better off with the investment than to prepay.

Considering things like this will help you decide if making a big payment on your mortgage is right for you.