To many, it makes sense to prepay your mortgage. If you’ve got enough income, you might as well invest it in your home, right? Then, you’ll own the home mortgage free and won’t have to worry about a monthly mortgage payment. Well, there are many more things to consider in the decision of whether to prepay your mortgage. This article will explore ten tips of what to consider when deciding to prepay a mortgage. First, consider some of the benefits:
- The first consideration in deciding whether to prepay your mortgage may be peace of mind. If you pay off the mortgage, you don’t have to worry about someone coming and taking the home from you because you own it. You have the pleasure of knowing that the house is yours outright. You still must pay yearly property taxes, but the house belongs to you.
- You will no longer have a mortgage payment. The idea of no more mortgage payments may be something that motivates you to prepay your mortgage. This means that your monthly bills no longer include that huge amount for the mortgage. This will free up income for other things, especially in times when the budget is tight. If you’ve got the money to prepay your mortgage, this will end the monthly mortgage payments.
- If you decide to sell the house, you get all the money for it, aside from the commissions to the realtor and/or attorney fees. This is a big plus for many people. If you sell your house, you get back all the money you put in plus the increase in value from the price you paid for the home. This could be a big lump sum that would allow you to then put a huge down payment on a nicer home, or give you the freedom to travel. You will no longer have a mortgage debt that must be paid back when you sell the home.
- Marriage considerations. If you get married, everything you accumulate from that point on becomes part of the marital property, unless it is directly traceable to non-marital funds. The laws vary somewhat from state to state, but this is a general rule. If you are able to pay your house off before you get married, it will remain yours. You can keep it in your name and not have to worry about losing it if you would divorce. No one ever wants to think about divorcing, but the reality is that it happens often. If the house means something to you, you don’t want to risk having to sell it to divide the proceeds as part of the divorce.
- Estate considerations. In the event that something should happen to you, if you have paid off the mortgage, it can go to your child or other relative. The child would only have to pay any inheritance taxes due. If you have not yet paid the mortgage, the person who inherits the home would have to pay the remaining mortgage payments. This would help you ensure that your child gets to keep the house without having to come up with monthly mortgage payments. This might be especially valid if you are terminally ill or in bad health, and don’t want to take any chances of what would happen to the house.
- You’ll pay less in interest overall for the mortgage. If you pay the mortgage early, you’ll save paying those additional years of interest on the house. Do you realize that you’re probably paying 50% or more of the cost of your home in interest fees over the life of the 20 year or 30 year mortgage? You’ll save all of this money if you prepay your mortgage. Even if you can’t prepay the whole mortgage, making extra payments or making payments larger than the amount required will pay off the loan sooner, so you’ll pay less in interest.
Now, consider some things which may or may not be positives:
- You will no longer receive a tax credit on your yearly taxes when you itemize deductions. One big reason to keep a house mortgage is because the interest paid on it is fully deductible when you itemize deductions on your tax return. To itemize deductions, your itemizations should total more than the standard deduction, or there’s really no tax advantage. If you cut out one major itemized deduction, you may not have enough other deductions to benefit any longer. This is a consideration you definitely want to make if you are in a high tax bracket and pay alot in taxes. This also is valuable if itemizing deductions and coming up with a lower income figure keeps you from crossing into the next tax bracket.
- If you prepay your mortgage, you will have to pay your property taxes directly. You may have things set up so that your mortgage company pays your property taxes on a monthly basis each time you make a payment. You never have to worry about this. If you prepay your mortgage, you’ll have to start paying the taxes directly. You’ll get a bill each year that gives you the option to pay all at once or in two semi-annual payments. This ends your ability to make monthly mortgage payments that go to your taxes. You’ll now have to pay the property taxes all at once or twice, for each of county and city property taxes (depending on where you live.)
- Consider the interest rate on your mortgage. If it is low, and you can get a higher rate of interest putting the money elsewhere, you might not want to prepay your mortgage. If you owe $20,000 more on your mortgage at 6% interest rate, but you can find a certificate of deposit or other investment that will pay you 8% on your money, you’ll end up with more money in the long run to keep the mortgage. Put that $20,000 into the other investment vehicle.
- Consider the interest rates on other loans you have. If you have credit cards with huge interest rates, you should pay these off before your mortgage. This will decrease the overall amount of money you will pay out in interest for all of your debt.
Overall, you should take into account the effects of taxes and interest in your decision to prepay your mortgage. Consider the effects on your estate and what will happen if you marry. Consider whether other investment options could be a better place for your extra money.