There are several reasons why people prefer to prepay their mortgages. The first one is financial – by eliminating their mortgage, they reduce their total amount of debt and lower their monthly expenses in the long run. The end goal, however, can be worded a bit differently – prepaying your mortgage will produce greater wealth for those who can afford it. Still, it also raises the question of – will it produce the greatest wealth, and what are your other options?
The second reason for paying off your debt is psychological/emotional. Living with debt is not a pleasant thought. Some people just can’t stand the pressure and feel that debt is a burden. It raises the level of stress and makes them feel like they shouldn’t be spending (or even enjoying) their own money.
On the other hand, paying off debt can have a positive impact on their mental well-being and, in some scenarios, even their self-confidence. In today’s world, being able to pay off a major debt can be seen as a significant accomplishment.
As always, things are not so black-and-white. Your desires and aspirations are important, but you need to approach this decision from a more pragmatic standpoint. You need to be able to afford mortgage prepayment, and you need to ensure that this is the smartest way to use this excess of money that you have available.
With that in mind and without further ado, here are some thoughts on how you can prepay your mortgage and whether you should do it to begin with?
For the majority of people, a monthly mortgage payment is a major financial challenge, which is why they usually stick to the minimum necessary payment. The only way to prepay your mortgage is to pay more than this, but how much more and in what way?
- Well, some people just apply a lump sum in order to pay off the entirety of their remaining mortgage. This is a significant expense, and it may come from an inheritance, unexpected income (like a lottery win), etc. While this is the quickest and cleanest way to deal with this situation, it’s quite unreliable. After all, it’s an event that you can’t control and an event that is just as likely not to happen.
- Second, you can add a few extra dollars to each payment. This method is probably the simplest, but it’s quite challenging for a number of reasons. As we’ve mentioned, every mortgage payment is significant for your monthly budget, which is why this extra money needs to come from somewhere. A bit of austerity goes a long way.
- You can also make an extra mortgage payment every year. While this method is slower than the above-listed two, it’s keeping you ahead and bringing your closer to the goal with every passing year.
- Recasting your mortgage is also a method that’s known to be a good idea on occasion. It’s a way for you to invest in your home equity and keep the biggest portion of your income at the same time. Before doing this, make sure to consult veteran mortgage brokers and ask for their advice.
Lastly, you can combine these methods for maximum impact. For instance, you can invest a major lump sum and then proceed to add a few extra dollars on each payment, etc.
Is It Better to Prepay Your Mortgage or Invest?
One of the biggest dilemmas that people in this financial situation face lies in the fact that they clearly, have some extra cash on their hands. This cash can be used to improve their financial situation, but is it more efficient to invest (into a potentially money-making venue) or outright prepay your mortgage? Well, there are a couple of things to consider here.
- First of all, it depends on the investment in question. You see, not all investments are made the same, and there are some opportunities that are just too ideal for you to miss. However, if an investment requires you to wait for years until the passive income starts rolling in, chances are that you’ll waste thousands of dollars of interest by that point.
- In the long-term, the sooner you invest, the more you’ll earn. Also, you’re bound to wait for the return, either way. The sooner you invest, the sooner you’ll start seeing the ROI. Increasing your future wealth is another major reason for investing, aside from the fact that you’ll get better asset liquidity.
- Now, not everything can be measured through money (even when it comes to your finances). You see, from a psychological standpoint, it’s worth pointing out that living with debt is not an easy thing. It can make even the idea of spending your own money well… uncomfortable. We should also point out that investing is riskier. The money you’ve invested towards prepaying your mortgage will always reduce the amount of money you owe. The investment you make will not always pay off.
While this is a question without a straightforward answer, the majority of financial advisors would agree that prepaying your mortgage is a generally safer and smarter move.
Considerations Before You Start Prepaying Your Mortgage
There are several things you need to take into consideration before you start prepaying your mortgage. The first of these things is a sort of a personal checklist. For instance, you need to start by asking:
- Is your monthly budget enough for your current expenses?
- What are the odds of your income becoming variable or unpredictable in the nearest future?
- Do you have other debts, and are you saving for the requirement?
- Do you already have an emergency savings fund?
Only after answering these questions are you ready to proceed to the next line of questions and considerations. For instance:
- You may have high-rate debt that you should be paying off first.
- Starting or expanding your emergency fund might be a smarter financial move.
- Your mortgage (or another loan that you plan to pay off) may have prepayment fees or penalties.
Another thing you should consider is the fact that a particularly low-interest debt may actually help your credit score. It prolongs your credit history, helps you boost your credit score, and doesn’t cost you much in terms of interest. In this particular scenario, prepaying might not be worth it.
The single biggest concern that you should have on this subject matter is whether the money you’re using for mortgage prepayment will be needed more elsewhere. Regardless if we’re talking about a lump sum or an extra monthly payment, this money has the potential to be used for something else. This potential investment doesn’t even have to exist now, but what if there’s an emergency or an excellent investment opportunity in the future? You’ll have to figure out this dilemma on your own.
Generally speaking, prepaying off your mortgage is a great idea, provided that your finances can handle it. The real question is whether this is the best possible financial idea, but such broad topics never have one definitive answer. Instead, you need to review your own financial situation, consult a financial specialist (both a mortgage broker and an accountant), and ponder on this topic for a while. It’s a major financial decision and, as such, not one that you should make overnight.