Advice about prepaying mortgages tends to fall neatly into two camps: the “Of course! You’d be an idiot not to” camp and the “What? Are you crazy?” camp.
The reality — and the best advice — isn’t so black and white.
The pro-payoff camp is right that paying down a mortgage can shave years off the loan and save tens of thousands of dollars.
Bankrate’s mortgage calculator lets you determine the effect of making extra payments by using the amortization schedule.
The anti-payoff camp is also right that mortgages are pretty cheap debt, especially if you get a deduction on the interest, and you’re likely to get a better return by investing that extra payment instead.
A comprehensive financial planner would tell you this isn’t an either/or decision. What’s right for you depends on the other details of your finances. Here’s what you should do before considering a mortgage prepayment.
Get the match. If you’re not getting the full company match from a workplace retirement plan, you’re passing up an instant return. The typical company match equals 50 to 100 percent of your contribution – up to a limit (often up to 3 to 6 percent of your income). That’s where extra money should go first. Many planners would encourage you to continue contributing to such plans until you’re on track for retirement, since contributions get a tax break and the more time your money has to grow, the better.
Pay off your higher-rate debt. It doesn’t make sense to pay off a 4 percent mortgage if you have credit cards accruing at 16 percent or more.
Plan for emergencies. A savings account with at least three months’ worth of expenses can help you weather most setbacks. Another option is to open a home equity line of credit and leave it unused, to be tapped in case of emergency.
Protect yourself. You should be adequately insured, which for most people means having property, health and disability policies. If you have financial dependents, you probably need life insurance, as well.
Once those bases are covered, prepaying a mortgage comes down to temperament. Would you sleep better at night with a paid-off home? Or would you rather have your money working harder for you in other investments? Once you know the answer to that, you’ll know in which camp you belong.