Is It A Good Idea To Prepay My Mortgage?

With interest rates at historic lows, many people are wondering whether it makes sense to prepay their mortgage. The answer to whether prepaying a mortgage loan makes sense depends a great deal on the interest rate of the mortgage, as well as how much the homeowner could earn on the money if they invested it instead of putting it into the home.

Of course there is a psychological benefit to paying off the mortgage early as well. Many people dislike being in debt, even for their mortgage and would just as soon retire the debt as quickly as possible. For these borrowers, the peace of mind of being debt free may well trump other considerations.

For other homeowners, however, a careful analysis of both the benefits and drawbacks of paying the mortgage early may be in order. On the plus side, of course, paying the mortgage early will reduce the amount of interest paid on the loan, and ultimately reduce the total amount paid. In addition, making an extra mortgage payment each month will cut the length of the loan in half, essentially making a 30 year mortgage into a 15 year loan without the hassle or expenses of refinancing.

On the negative side, making an extra payment on the mortgage means you have that much less to invest in other places, like the stock market for instance. Stocks have consistently produced superior returns over time, and you may be able to earn more money on these types of investments than you are paying in interest. Of course, investing also involves the risk of loss, and this risk will have to be weighed against the certain benefit of prepaying the mortgage.

Of course all these considerations assume that your mortgage loan does not have a prepayment penalty clause. It is not uncommon for newer mortgage loans to contain a prepayment penalty, so that is definitely the first thing to check. A prepayment penalty is designed to protect the bank or mortgage lender against losing the cost of writing the mortgage loan. If your mortgage loan is less than five years old, particularly if it is a variable rate mortgage with a low initial rate, it may well have a prepayment clause written in. If you are unsure whether you are subject to a prepayment penalty, be sure to check with the mortgage lender.

Prepaying a mortgage loan is a very personal decision each homeowner will have to make for him or herself. It can make a lot of sense, particularly on a high interest rate mortgage loan. Prepaying such a loan can allow you to quickly retire the mortgage without the expense of refinancing.