Should you prepay your mortgage or invest elsewhere?
Financial experts disagree about how smart it is to prepay a mortgage. Sure, it's nice to get out of debt, but the question is whether it would be even better to use that money elsewhere.
There's no doubt that it's a relief to be able to pay your mortgage down quickly. It's hard to put a price on the feeling of liberation that you'd feel once you're out of debt. In addition, many financial experts say it's the smart thing to do. If you do make early payments, be sure to let your lender know that the extra payment will count toward your principal balance [source: Leamy]. If there's no fee for paying the mortgage early, this will be getting rid of debt that the lender can no longer charge interest on. So, the long-term savings can be significant.
However, other experts argue that homeowners are better off investing that money somewhere else for a more substantial payoff. Your return on investment might be more than what you save by paying down your debt.
But for those who like to play it safe, paying down a mortgage is seen as a guaranteed return, because it's a sure way to save money. Especially in a difficult economy, this might be the more attractive option for you. However, even experts who advocate paying a mortgage early rather than investing in the market admit that there are situations when you're better off using that money somewhere else first. For instance, they say that you should only start to prepay your mortgage after you've contributed a lot to your retirement plans and paid off debt with higher interest rates, like credit card debt [source: Pond].
Remember that this is nice problem to have. If you can afford to prepay your mortgage, you're probably in a good situation. Just consider all your options before racing out of your mortgage debt. For lots more information on managing your money, see the links below.
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- Why does having too many options make it harder to choose?
- Gardner, Tom, David Gardner. "The Motley Fool Personal Finance Workbook." Simon and Schuster. 2002. (Nov. 7, 2011) http://books.google.com/books?id=usQ0gVQmK1AC
- IRS. "Publication 936: Home Mortgage Interest Deduction." Internal Revenue Service. Nov. 30, 2010. (Nov. 7, 2011) http://www.irs.gov/pub/irs-pdf/p936.pdf
- Leamy, Elisabeth. "Save Big: Cut Your Top 5 Costs and Save Thousands." John Wiley Sons. 2010. (Nov. 7, 2011) http://books.google.com/books?id=2HSHo4UuEvEC
- Lewis, Regina. "Ask the Expert: 'Should I Pay Off My Mortgage Early?" Daily Finance. July 12, 2011. (Nov. 7, 2011) http://www.dailyfinance.com/2011/07/12/ask-the-expert-should-i-pay-off-my-mortgage-early/
- McWhinney, James E. "Tax Deductions on Mortgage Interest." March 27, 2006. (Nov. 7, 2011) http://www.investopedia.com/articles/pf/06/MortIntTaxDeduct.asp#axzz1d1gYwOap
- Pond, Jonathan D. "Grow Your Money!" HarperCollins, 2007. (Nov. 7, 2011) http://www.irs.gov/pub/irs-pdf/p936.pdf
- Thomsett, Michael C. "Should You Use Extra Cash to Pay Down Your Mortgage?" Mint.com. April 28, 2011. (Nov. 7, 2011) http://www.mint.com/blog/goals/pay-down-your-mortgage-04282011/
- Vermillion, Dale. "Navigating the Mortgage Maze." Moody Publishers. 2009. (Nov. 7, 2011) http://books.google.com/books?id=0waFBt2axsYC