Mortgage Prepayment - Top Points to Ponder

When reality sinks in and mortgage holders realize how much interest they are paying on their home loan over the life of the loan, the knee jerk temptation may be to prepay the loan one way or another. Before you do make sure you think about these important points and weigh the alternatives carefully.

There are some pros and cons to repaying your mortgage early:

SAVE MONEY ON INTEREST Yes depending on the details of how long and how much you prepay you can save tens of thousands of dollars and reduce the term of the loan by years. On the face of it, it sounds great until you consider some of the following points.

TAX DEDUCTIONS For most people the interest is tax deductible so this needs to be part of the equation.

ALTERNATIVE OPPORTUNITIES If you had those dollars available to invest, for example, what could you achieve? Essentially if you can make more percentage wise on an investment than the cost of the mortgage which is relatively cheap it makes sense to invest rather than prepay.

PREPAYMENT PENALTIES Most loans don't have these any longer. Check to make sure before you make any prepayments. It could be a costly mistake.

RETIREMENT CONSIDERATIONS Be it a Keogh or 401k, if you are not maxing out a retirement plan and taking the tax break you may be making a big mistake. If you rather prepay your mortgage than maxing your retirement plan, you are making a mistake.

REFINANCING ALTERNATIVES Depending on your individual circumstance, refinancing to a better rate, shorter term, smaller amount, may achieve the same goal as prepayment. Do your homework. What are you trying to achieve?

LIQUIDITY Making a payment with a higher amount every month may put you in a cash poor situation. You should have a rainy day account with at least 6 months of salary/wages for emergencies.

Like everything else there are pros and cons of prepaying your mortgage. It is not as simple as it may first appear. Do your homework. If necessary, talk to a financial advisor, accountant, or attorney, someone who is not going to try to sell you something. Prepaying your mortgage is not all necessarily good.

Jack Krohn is a leading free lance writer on Home Equity and Mortgage issues with over 35 articles to his credit. He is also the #1 author of Home Security Articles in the country according to Ezine Articles.

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