Is it smart to pay off your mortgage faster?
Usually, yes. Faster payments will:
- Force you to save. Otherwise that money might be frittered away.
- Reduce the amount of interest you pay over any period of time that you hold the loan.
- Give you an attractive risk-free return on your money. Prepaying a loan is an investment. The return on your investment equals your mortgage rate. As an example, prepayments on a 6.5 percent mortgage give you a 6.5 percent investment return, guaranteed. That's a better deal than you'd get from other safe, taxable investments, such as a bank or money market savings account.
- Build your home equity faster. That's especially important in a weak housing market, where rising prices aren't building equity for you.
- Put you in a better position to trade up to a larger house. When you sell, you'll have more money in hand to put toward your next down payment.
- Ensure that you're mortgage free by the time you retire.
- Lower your cost of living, if you inherit a bucket of money and put it toward reducing or eliminating your loan.
- Get you a lower interest rate. The rate on a 15-year loan may be a quarter or half point less than the rate on a 30-year loan.
- Save you a small fortune in interest payments.
It does not make sense to quick-pay your mortgage if:
- You're carrying credit card debt that's costing you 12 to 28 percent or more. By paying it off, you get a 12 to 28 percent return on your money. First get rid of consumer debt. Then accelerate mortgage payments, starting with any home equity debt.
- You aren't investing enough for your retirement. Maximize your 401(k), 403(b), IRA, or Roth IRA account before tackling your mortgage debt.
- You don't have an emergency savings account. Build this cushion fund first.
- You have children and haven't been saving enough to help them with the expenses of higher education. Start or add to your 529 investment.
Once you've taken care of your retirement fund, emergency savings, and college savings, you're ready to prepay your mortgage loan.
Excerpted from Making the Most of Your Money Now by Jane Bryant Quinn
Copyright 1991, 1997, 2009, by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, IncBuy the Book