Home > Mortgages > Should You Prepay Your Mortgage?

Comments 0 Comments

Having debt, even “good” debt like a mortgage, can be a major stress in your life. It can be especially frustrating when you see how much of your hard-earned cash is going to pay off interest on your loan and not the home’s principal cost. You could end up paying as much as double your home’s sticker price over the term of your loan. But prepaying your mortgage can help you keep money in your pocket.

By paying more money monthly, you can cut down on the interest you owe, get your home paid off sooner and build equity faster. It can even help you reach retirement sooner. But before you jump on board, it’s important to carefully assess your financial situation and understand the basics of mortgage prepayment.

How to Prepay

First, it’s important to know the interest rate and remaining balance on your mortgage, then decide how much you want to (and are able to) prepay. You can contribute a lump sum to cut down the overall cost if you have received an inheritance, bonus or other windfall. You can also add a few dollars to each payment, make an extra (13th) annual payment, or some combination of these options.

Next, make sure that your mortgage allows you to prepay and doesn’t include a prepayment penalty. Then contact your bank or mortgage company and verify that all extra contributions will be applied directly to the principal. You can then automate this larger or additional payment so you can stay on track without having to do so manually.

Difference Between Refinancing & Prepaying

Prepaying may seem similar to refinancing your mortgage, as both can help you pay off your mortgage faster. Refinancing, however, requires getting an all-new mortgage with new terms and paying closing costs again. You’ll also need to go through a credit check again, and if you haven’t been paying close attention to your scores, that could be problematic for you. (You can see where your credit scores stand for free on Credit.com.) This is generally done to reduce interest rate, reduce payments or reduce risk of future rate increases. It’s important to calculate the point when monthly savings of the new mortgage become greater than the upfront costs of the refinance process.

The prepayment decision, by contrast, is more of an investment decision. You should consider your aversion to risk and whether prepaying your home or putting those funds into CDs or bonds will earn better yields. This includes both the better option financially and emotionally, since some people sleep better at night being debt-free.

So, Should I Do It?

Deciding to make prepayments on your mortgage is a personal financial issue. Prepaying reduces mortgage interest, which is tax-deductible and may not be a smart move depending on your tax situation. It’s also important to consider if your return on investment might be higher elsewhere. As with any other large financial decision, you should be assessing your overall goals.

Getting rid of higher-interest debt (like from a credit card or private student loan) may be a smarter decision than making mortgage prepayments. It’s a good idea to make sure you are contributing enough to your retirement savings plans to ensure you are on track for a comfortable retirement before pooling extra funds to finance your home. Prepaying has the potential to save you thousands of dollars in interest, but it isn’t right for everyone (you can check out your lifetime cost of debt here). It’s important to weigh the pros and cons carefully.

More Money-Saving Reads:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team