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Does It Pay to Prepay Your Mortgage?


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TERMINOLOGY

If you are trying to decide whether you should prepay a mortgage or not, there are several variables that you will have to consider. Prepaying your mortgage involves making extra payments to your mortgage lender in order to payoff your mortgage faster. This can be done by making a lump sum payment, or by making slightly larger monthly payments over the course of the mortgage. Both options can help you pay off your mortgage faster. The goal is to save money on interest and eliminate the mortgage payment, which is usually the largest payment a person must pay.

Tax Issues

One thing that you will have to consider is the tax issues that are present. As a homeowner, you get great tax deductions. You can actually deduct the amount of interest that you pay on your mortgage from your taxable income at the end of the year. Towards the beginning of your mortgage, this can be a substantial amount of money. This deduction could potentially put you in a lower tax bracket, depending on your income. If you pay off your mortgage early, you are no longer going to get access to this tax break.

Investments

Instead of applying extra money to prepaying your mortgage, another option that you have is to invest the money. You could purchase stocks, bonds, mutual funds, or any number of other investments. When you do this, you could potentially earn a nice return on your investment. If you have a low interest rate on your mortgage, this should be a consideration for you. For example, if you have a mortgage at 5 percent, you could potentially do better than that in the stock market. If you earned 8 percent on your stocks, many would not make much sense to put your extra money into paying off your mortgage.

Liquidity

Another issue that you are going to have to consider is liquidity. When you put your money into stocks or other investments, you can easily gain access to your money when you need it. You will simply have to sell the stock and the money will be transferred to your account immediately. When you prepay your mortgage, this is not going to be the case. In order to access the money in your equity, you are going to have to take out a home-equity loan, refinance your mortgage, or sell your house. All of these options are going to cost you some money and it will take time to access your money.

Psychological Benefits

Some people prefer to pay off their mortgage early because of the psychological benefits that they receive. When you prepay your mortgage, you can eliminate your biggest monthly payment and free up a lot of money in your budget. Some people like the idea of not knowing a large amount of money to anyone else.