For a lot of us, it makes sense to prepayment of mortgage. If there is enough cash, you can invest it in your home. No need to worry about monthly interest payments running into tens of thousands of dollars, and pay off your debt early. It seems very simple, right? However, to determine whether prepayment of mortgage is a wise move, you need to weigh in variables such as your mortgage rate, age, tax bracket, and other debts.
The obvious advantages to prepayment of mortgage include peace of mind, freeing up your income from monthly mortgage payments, freedom to sell the house and earn back all the money put in with the bonus of increase in value from the price you originally paid for it. Also, consider the effects on your estate and what happens if you marry. More than anything else, prepayment of mortgage ensures you save on paying additional years of interest on the house.
On the flip side, you will no longer receive a tax credit on your taxes while itemizing deductions. This increases the risk of crossing into the next tax bracket. You will have to pay your property taxes directly ending your ability to make monthly mortgage payments that go to your taxes. Consider interest rates. Suppose you owe $30,000 more on your mortgage at a 6% interest rate and there is another investment paying 9% on the money. Put that $30,000 into the other investment vehicle, giving you more money in the long run to keep the mortgage. Take into account your entire debt load when thinking about prepayment. If you owe a high-priced debt such as a credit card, you’re probably better off paying that down before looking at your lower-interest loan.
Overall, you should take into account the effects of taxes and interest in your decision to prepayment of mortgage. Consider whether other investment options could be a better place for your extra money before making the prepayment decision.
