{"id":626,"date":"2019-08-14T11:15:51","date_gmt":"2019-08-14T11:15:51","guid":{"rendered":"https:\/\/householdrealestate.com\/?p=626"},"modified":"2019-08-14T11:15:51","modified_gmt":"2019-08-14T11:15:51","slug":"should-you-prepay-your-mortgage-the-pros-and-cons","status":"publish","type":"post","link":"https:\/\/householdrealestate.com\/a\/blog\/uncategorized\/should-you-prepay-your-mortgage-the-pros-and-cons\/","title":{"rendered":"Should You Prepay Your Mortgage? The Pros and Cons"},"content":{"rendered":"
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Should You Prepay Your Mortgage? The Pros and Cons<\/h1>\n
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By\u00a0Daniel Bortz<\/a><\/span>\u00a0|\u00a0Aug 13, 2019<\/div>\n<\/div>\n
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Should you prepay your\u00a0mortgage<\/a>? For some homeowners it\u2019s a financially savvy move\u2014but for others, beefing up their loan payments just doesn\u2019t make sense. To help you figure out whether prepayment is right for you, here are the pros and cons cited by financial experts.<\/p>\n

Pro: You’ll cut down on the interest you owe<\/h2>\n

Interest is the extra fee you pay your lender for loaning you the cash you needed to buy a home. After all, lenders don\u2019t just hand out dough for free\u2014they\u2019re in the business to make money.<\/p>\n

By increasing your monthly mortgage payments\u2014also called \u201cprepaying\u201d your mortgage\u2014you\u2019ll effectively save money in interest charges. Those savings can add up big-time.<\/p>\n

For example, let\u2019s say you take out a $200,000 mortgage with a 4% fixed interest rate and a 30-year term. If you continue to make your minimum monthly payments, you\u2019d be forking over $143,739 in interest over 30 years until the debt is paid off. But, by paying an extra $100 per month, you\u2019d pay only $116,702 in interest over a 25-year time span\u2014a savings of $27,037.<\/p>\n

Pro: You\u2019ll get your mortgage paid off sooner<\/h2>\n

By accelerating your mortgage payments, you\u2019ll also be shortening\u00a0how long it takes to pay off the loan<\/a>, which would increase your cash flow in the future. That\u2019s a huge incentive for some borrowers.<\/p>\n

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\u201cFor families with young children, where the parents are concerned about paying for their children\u2019s college tuition, sometimes we will recommend they increase mortgage payments so that when their kids head off to college their mortgage obligation is gone,\u201d says Joe Pitzl<\/strong>, a certified financial planner for Pitzl Financial, in Arden Hills, MN.<\/div>\n<\/div>\n<\/div>\n

Paying more money each month toward your mortgage\u2019s principal can also give you peace of mind, says\u00a0Marguerita Cheng<\/strong>, a certified financial planner at Blue Ocean Global Wealth in Gaithersburg, MD.<\/p>\n

\u201cEmotionally, it\u2019s gratifying knowing that you\u2019re paying your mortgage sooner than you originally planned to do,\u201d Cheng says.<\/p>\n

Pro: You\u2019ll build equity faster<\/h2>\n

No matter how much money you put down on your mortgage, your home equity is the current\u00a0market value of your home<\/a>\u00a0minus the amount you owe on your loan. So say your home is worth $250,000 and your mortgage balance is $200,000. In this case, you\u2019d have $50,000, or 20%, in home equity.<\/p>\n

Making larger mortgage payments toward your loan’s principal would enable you to build equity faster. Having more home equity can be a tremendous boon if you\u2019re looking to get a\u00a0home equity loan<\/a>\u00a0or\u00a0home equity line of credit<\/a>, such as to pay for home improvements, says\u00a0Tendayi Kapfidze<\/strong>, chief economist at Lending Tree.<\/p>\n

Pro: It helps your credit score<\/h2>\n

Showing that you have less debt\u2014and that you manage your debts responsibly, by paying your mortgage off early\u2014can\u00a0raise your credit score<\/a>. That can help if you\u2019re planning to apply for a car loan or a second mortgage on a vacation home, since your credit score would affect the interest rate you qualify for.<\/p>\n

Con: Prepaying reduces mortgage interest, which is tax-deductible<\/h2>\n

Because prepaying your mortgage reduces your mortgage interest, it may not make sense from a tax-savings perspective. Mortgages are structured so that you start off paying more interest than principal.<\/p>\n

For example, in the first year of a $300,000, 30-year loan at a fixed 4% interest rate, you’d be deducting $10,920. (To find out how much you paid in mortgage interest last year, punch your numbers into our\u00a0online mortgage calculator<\/a>.)<\/p>\n

Nonetheless, taking a mortgage interest deduction under the new tax law requires\u00a0itemizing deductions<\/a>\u2014and itemizing may no longer make sense for many homeowners, since the standard deduction jumped under the new tax plan to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly.<\/p>\n

Another thing to consider: In the past, you could deduct the interest from up to $1 million in mortgage debt (or $500,000 if you filed singly). However, for loans taken out from December 15, 2017, onward, only the interest on the first $750,000 of mortgage debt is deductible, says\u00a0William L. Hughes<\/strong>, a certified public accountant in Stuart, FL.<\/p>\n

Con: You could miss out on more lucrative investment opportunities<\/h2>\n

Every dollar you put toward your mortgage principal is a dollar you can\u2019t invest in higher-yield ventures, such as stocks, high-yield bonds, or\u00a0real estate investment trusts<\/a>, Pitzl says.<\/p>\n

That being said, \u201cyou\u2019d be assuming more risk by investing your money in, say, the stock market instead of putting the money toward your mortgage,\u201d Pitzl points out.<\/p>\n

\u201cYou have to consider your risk tolerance before you decide where to put your extra cash,\u201d says Cheng.<\/p>\n

Con: You may miss paying off higher-interest debts<\/h2>\n

For many homeowners, paying off higher-interest debt\u2014such as from a credit card or private student loan\u2014is more important than prepaying their mortgage, Cheng says.<\/p>\n

Think about it: If you\u2019re carrying a $400 debt on a credit card from month to month with a 20% interest rate, the amount of money you\u2019re paying in credit card interest is $80 per month\u2014that would be leaps and bounds higher than what you\u2019d be paying in mortgage interest on a home loan with a 4% interest rate.<\/p>\n

Con: Prepaying a mortgage could hamper achieving other financial goals<\/h2>\n

Building\u00a0your retirement savings<\/a>\u00a0is crucial, of course. However, some people make the mistake of prepaying their mortgage instead of maxing out their retirement contributions, Cheng laments.<\/p>\n

\u201cAt the bare minimum, I recommend my clients do a full 401(k) match with their employer,\u201d she says.<\/p>\n

Moreover, Pitzl encourages people to build a sufficient emergency fund\u2014typically, a fund large enough to cover three to six months of their essential expenses\u2014before they focus on prepaying their mortgage.<\/p>\n

\u201cIf you get into a bind, you can\u2019t sell off windows and doors to make ends meet,\u201d Pitzl says.<\/p>\n

Con: There may penalties for prepaying your mortgage<\/h2>\n

Some lenders charge a fee if a client\u2019s mortgage is paid in full before the loan term ends. That\u2019s why it\u2019s important to check with your mortgage lender\u2014or look for the term \u201cprepayment disclosure\u201d in your mortgage agreement\u2014to see if there\u2019s a penalty and, if so, how much it is.<\/p>\n

The bottom line: If you don’t have enough money to pad your savings before you begin paying off your mortgage early, prepaying your home loan may put you in a financial hole if an emergency crops up.<\/p>\n

Still not sure what direction to go in? Consider sitting down with a financial planner to discuss your options based on your personal finances.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Should You Prepay Your Mortgage? The Pros and Cons By\u00a0Daniel Bortz\u00a0|\u00a0Aug 13, 2019 \u00a0 aydinmutlu\/iStock Should you prepay your\u00a0mortgage? For some homeowners it\u2019s a financially savvy move\u2014but for others, beefing up their loan payments just doesn\u2019t make sense. To help you figure out whether prepayment is right for you, here are the pros and cons […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-626","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/posts\/626","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/comments?post=626"}],"version-history":[{"count":0,"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/posts\/626\/revisions"}],"wp:attachment":[{"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/media?parent=626"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/categories?post=626"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/householdrealestate.com\/a\/wp-json\/wp\/v2\/tags?post=626"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}