Thinking About Pre-Paying Your Mortgage?

By Deborah Laemmerhirt | August 21, 2013

Many homes “free and clear.” In anticipation of that day, some homeowners speed up their mortgage payments by paying more toward the principal whenever they have some extra cash.

These homeowners get an enormous sense of satisfaction as they watch their mortgage balances diminish each month. By accelerating payments, not only will they pay off their mortgages sooner, but they’ll also cut down on the total interest they’ll pay over the life of the mortgages.

Although these prepaying homeowners think they’re doing themselves a great service, some financial advisers say they’re making a mistake. Their argument: When you prepay your mortgage, you’re basically investing in your house. As an investment, it’s extremely non-liquid and the transaction costs to sell it are phenomenally high.

Plus, when you put all of your extra money into your house, you have nothing left over to fund other investments. This goes against the basics of smart financial planning. For years, financial experts have stressed the importance of a diversified portfolio. However, when you put all your money into mortgage prepayment, all you’re getting for it is the appreciation of your house. That can be the opposite of a diversified portfolio. Of course, it all depends on where you are investing and what is happening with the stock market if that is where you are putting the majority of your moneyhomeowners dream of the day when they’ll mail in their final mortgage payment and own their

.

Despite these facts, many homeowners still want the emotional high that comes with fully owning their own home. If you’re one of them, you should consider the following factors before paying off a mortgage:

Factor#1: Your Mortgage Rate

If you have a 30-year mortgage with a low fixed rate, financial advisers usually say it’s best to stretch out your payments for as long as possible. With this kind of mortgage, you shouldn’t even consider prepaying unless all your debts are paid off and you have enough money to put in other investments as well. On the other hand, if you have a higher interest rate of 8 percent or more, you should generally either pay off your mortgage as quickly as possible or refinance.

Factor #2: Credit Card Debt

If you are carrying any credit card debt, the thought of prepaying your mortgage should not even cross your mind. Because credit card debt typically carries a high interest rate, you should generally focus on paying it off before anything else.

Factor #3: Investments

Financial advisers often say that when you spend your money prepaying your mortgage, you’re basically leaving free money on the table. How so? Because if you spend all your extra funds on mortgage prepayment, that means you’re not investing in your 401(k) at work or other tax-deferred retirement plans.

If you are fortunate enough to have an employer that “matches” the amount of money you put in a 401(k), it’s considered a “no-brainer” investment. Some financial advisors go so far to say that consumers should put the minimum in their 401(k) to get their employer’s match before even paying off their credit card debt. After all, it’s a 100 percent return on your money.

So once you’ve gotten rid of your credit card debt, you’re investing money in a diversified portfolio and you’ve built up a healthy savings account, then is it a good time to prepay your mortgage? More considerations:

  • If you have a fixed low-rate mortgage, your fixed monthly payment will become an even better deal as the years pass and inflation increases.
  • You’ll probably benefit from deducting mortgage interest on your income taxes.
  • If you use the money to invest elsewhere, you’ll have other valuable investments earning money for you. In the long run, paying off your mortgage isn’t going to add to your wealth-and it can actually subtract from your potential wealth because you could be putting that money into more valuable investments. Prepaying your mortgage is obviously a personal and emotional decision. If you are considering paying off your mortgage, discuss your options with a professional financial adviser.

Posted in News

About Deborah Laemmerhirt

Let me assist you in finding everything you need to know about buying or selling a home! As the preeminent real estate professional in my community, I am dedicated to providing the finest service available while breaking new ground. Because the real estate industry is becoming more sophisticated and challenging every day, you need a professional that understands the industry and is positioned to stay ahead of the game. I go the extra mile to help you achieve your goals. That’s why I constantly research the home, market and estate values so your home is priced effectively from day one. I also make sure the public knows your home is for sale by using innovative marketing techniques to attract potential buyers. As an Internet-savvy real estate representative in Connecticut, I’ve had the opportunity to help many home buyers find their ideal homes and many sellers obtain top dollar for their homes. Buying or selling a home is one of the largest financial transactions that most people ever undertake, so I will help you through every step of the process. My goal is to make your home selling or buying experience as easy and enjoyable as possible. My services include: Explaining the home selling and buying process thoroughly Diligently selecting homes that meets your criteria Pricing your home correctly and implementing a unique yet proven marketing plan Negotiating on your behalf Tracking the closing process to ensure a smooth transaction I welcome the opportunity to address any questions you might have about buying, selling or current market conditions. Please call or e-mail me any time, and I will be happy to discuss your next steps in the buying or selling process. I specialize in both Residential and Commercial Properties. I also head a Real Estate Group to provide you with expert service and support. Areas of Expertise Making transitions in your life is challenging. You may be moving from out of town, a different state, internationally or just next door! Regardless of the distance I am prepared to respond to your unique needs.If you are a BUYER looking to downsize, up-size, want a new construction, desire a condominium, to invest, even if this is your first home, I will design a unique plan to fulfill your needs in a reasonable time frame, with the best negotiated price and the least amount of inconvenience.For my Home Sellers, I have an innovative marketing plan that will leave nothing to chance. Just call, and I would be happy to share the DIFFERENT and SUCCESSFUL TOOLS I utilize on each of my listings. I have lived in Connecticut for over 35 years. I practice Real Estate in Fairfield County, New Haven County and Litchfield County. This includes, but is not limited to Bethel, Bridgewater, Brookfield, Danbury, Harwinton, Kent, Litchfield, New Fairfield, New Milford, Newtown, Oxford, Ridgefield, Redding, Roxbury, Sherman, Southbury, Warren, Washington, Westport and Wilton.