If you are a home-owner and have to pay monthly mortgage payments then, at some point you might have considered to pay off your mortgage earlier and faster to reduce the debt load. This may sound a very financially beneficial decision assuming that you mortgage lender does not put some kind of penalty.
To prepay your mortgage, you just have to make additional payments and these payments can be made in a variety of ways from paying a little extra every month to depositing 2 mortgage payments every month i.e. twice the amount due for that month. This may sound like a simple plan but, it is difficult to know whether this is a smart move for you or not depending in your income and financial influx.
To show you a clear picture and help you decide, we have listed the pros and cons of prepayment of mortgage.
Pros of Prepayment of Mortgage:
The major attraction is the fact that you get to pay less money in interest and that you get to pay your mortgage faster than usual. The principal of mortgage states that for every dollar you put towards your mortgage early will lower the interest you pay over time. Paying down this principal quicker will allow you to pay down the loan faster. You should confirm with your lender whether this principal of mortgage is applicable to you or not.
Considering the low interest rates over the past decade, U.S financial assets are expensive right now which means that if you are planning on prepayment of your mortgage, you might be able to generate a better return with less risk.
Cons of Prepayment of Mortgage:
While prepayment of your mortgage may look attractive, it also has its downsides. If your plan of prepayment is to pay on a monthly basis then you are cutting a large portion of your salary for mortgage payment leaving behind less money for your other necessities. If you have a variable amount of income every month then this can put more stress on you and leave very little room for emergency expenses that might come your way.
Even if you are financially stable and can cover the costs of prepayment of your mortgage monthly, it is still important to take a look at your expenses and savings so that you can be sure that you are not cutting from other necessities and that this is the best use for your money. Because, for many people prepayment of mortgage is not the first priority for the additional money that they have.
Also, there is a chance that you may be able to build your wealth over the long run by not accelerating your mortgage payments. In the coming years, due to expanding Federal deficit and other multiple factors there is a chance that inflation will be accelerating over the course of next ten years and in an inflationary environment it is best to be a debtor than a creditor. With the deprecation of dollar, the real value of your mortgage liability should also decline.
In the end, it all comes down to your goals. If your primary goal is to pay less mortgage and owning a home as soon as possible, then you should consider the options of mortgage prepayment or even refinancing but, if you are concerned with increasing you wealth over time then it is best that you stick to your mortgage payment plan.