Wondering if prepaying your mortgage is the right choice? Discover when it makes sense and when it doesn't.

Purchasing a home is among the largest financial commitments you'll ever make. But do you want to be paying for it throughout your life? Likely not. If you can afford it, should you consider prepaying your mortgage?

In most cases, yes. Prepaying can save you considerable interest, decrease your loan term, enhance your home equity, and help you fully own your home sooner. However, before you start making extra payments, consider if your funds might be better allocated elsewhere: Do you have other debts? Is your retirement savings on track? Do you possess an emergency fund?

If you have debts, aren't maximizing your retirement contributions, or lack an emergency fund covering six to twelve months of expenses, hold off on prepaying your mortgage for now. But if you're financially stable, here's what you should know.

Advantages

Making just one additional mortgage payment annually can lead to significant savings on your loan. For instance, borrowing $100,000 on a 30-year fixed mortgage at 4% results in a monthly payment of $477. By making 13 payments a year instead of 12, you could save over $10,000 in interest and cut your loan term by four years. Use the Bankrate calculator to see the impact on your loan. If you double your monthly payment, you could eliminate that 30-year loan in just 11 years.

When you send in your extra payment, clearly indicate that it should go toward the principal. Otherwise, the lender might apply it to interest, which doesn't help build your equity. Be cautious about prepayment penalties, which some lenders might impose if you pay off your mortgage early within a specified timeframe, typically during the first two to four years of the loan.

Disadvantages

Prepaying a mortgage isn't suitable for everyone. Besides ensuring your higher-interest debts are settled first and your retirement and emergency funds are established, consider these factors before prepaying:

  • Your interest rate is very low. If you've secured a 30-year fixed-rate mortgage at 4% or lower, that's an excellent interest rate. You might want to keep that rate while investing your extra cash elsewhere.
  • You have alternative investments with better returns. You could allocate your savings toward the stock market or different ventures that yield higher long-term returns, including investment properties.

If your situation doesn't fit these scenarios, consider applying extra payments to your principal this year. The sooner you pay off your mortgage, the more you'll save overall.