If you have a mortgage it is probably one of the biggest single debts you are likely to have. Being able to properly manage your mortgage is very important especially with so many options when it comes to loans, repayment and refinancing. It can all get a bit confusing and overwhelming. At some point you might hear a lot of talk about is prepaying your mortgage.
Should you prepay your mortgage? Should you focus on other things first? Before rushing into prepayment, make sure you have all of the information first.
What Is Mortgage Prepayment?
Mortgage prepayment is the act of paying some or your entire mortgage principal before it’s actually due. This can take a number of forms, from paying a higher amount than the actual payment that’s due each month to making additional payments in months where you have money to spare. Some homeowners even make a single large additional payment every year after getting a tax return. Regardless of the specific form that prepayment takes, the result is still the same: More of your outstanding mortgage balance gets paid off, resulting in a decrease in both the amount that you still owe and the amount that interest can be applied to.
What Are the Benefits of Prepaying?
There are several benefits to prepaying your mortgage, regardless of how often the payments are made. Consider the following and how they might apply to your mortgage situation:
- Faster repayment of the mortgage loan
- Decreased cost of the mortgage over time
- Equity is accrued at a faster rate
- Prepayment reduces principal, making it easier to qualify for refinancing
Essentially, prepayment gives you more control over your loan and helps you to save money, build equity and pay off the loan faster. Since you are paying down your mortgage at a faster rate, you will likely have an easier time refinancing for a better interest rate and loan terms down the road. And since the prepayment is optional, you can always skip prepayments and simply pay the monthly payment due if money is tight. Because of this, many people choose to incorporate prepayment plans into their overall preparations for retirement.
Are There Any Downsides?
While there are definitely benefits to prepaying your mortgage, there are potential downsides as well. Some mortgages, especially those with adjustable rates, are designed to not allow prepayments; if you attempt to prepay on the mortgage, this can trigger a penalty fee. Additionally, some lenders only accept prepayments in certain forms and will apply any other money received as simply an early payment against the next month (which means that the money will go toward interest and principal and not just your principal loan balance.)
Attempting to prepay when you have significant debt elsewhere or don’t have a safety net built up for you and your family is not a good idea. Your mortgage likely has a lower interest rate than most if not all of your other debts, so you may be better off paying them off and building up savings and retirement funds first before you start worrying about prepaying a mortgage.
Should You Prepay Your Mortgage?
Whether or not you should prepay your mortgage depends on a number of factors. You should consider the type of mortgage you have, how much your monthly mortgage payments are and what your interest rate looks like. You should also take a look at your overall finances and how well prepared you are for emergencies and retirement. It’s possible that your money would be better off going elsewhere at the moment. Even if prepayments seem feasible and affordable, make sure that your lender accepts prepayments without penalty and that you know how they prefer to receive prepayments. Those extra payments won’t do much good if your lender simply applies them against interest or charges you a penalty fee because prepayments aren’t allowed by your loan.
It is also advisable to speak with your financial adviser or accountant.
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