Pre-Pay Your Mortgage? When You Should and Shouldn't

prepay mortgage
prepay mortgage

By Jill Krasny

It sounds smart on the surface: Pay your mortgage off early so you can free up cash flow, then effectively chop down your interest.

But with today's interest rates at historical lows, it's hard for consumers to tell whether making such a move will be worth it. Is it smarter to cut the check and clear the debt off the table for good? Or would homeowners do better to stay the course and invest the extra cash in other assets?

"Most people are pre-programmed into thinking, 'If I have extra money, I'll put it in my house,'" says Robert Stammers, director of investor education at the CFA Institute. "That was OK in the past because the interest rates were high, but these days it just doesn't make sense. People need to think of the best place to put that money."

Stammers and real estate columnist Ilyce Glink told Business Insider the best and worst times to pre-pay a mortgage.

When To Do It

You're underwater. When a person is underwater on their mortgage, owing more than their home is worth, there's no point in keeping that second loan around, said Glink. Even if the interest rate on the second loan is lower than the first, "paying off that second loan can really help people. This will provide more flexibility, just sending in that extra check every month," she says. Ideally, you should aim to get rid of the second loan within the next two to three years.

You're fully invested in your 401(K) and Roth IRA. "If you have a certain amount of cash, and you're not taking full advantage of it by putting that money in retirement savings, the money will be protected in bankruptcy" as opposed to your home, said Glink.

Homeownership is the dream. For some, there's a psychological benefit to saying you own a home. "On an emotional level, people feel really good when they pay it down," said Glink before adding that "being without a mortgage is one of the dreams of homeownership."

You're nearing retirement. If you're preparing to leave the workforce, it makes more sense to pay off your mortgage so you're free and clear by that time, said Stammers. Not only will this provide more security and reduce home expenses overall, it'll be easier to manage your money on a fixed income.

When To Hold Off

You aren't diversified. While it's true that your home is your single greatest asset, sometimes it makes sense to look at other assets to diversify yourself over time, said Stammers.

You're deep in debt. If you're living paycheck-to-paycheck or carry a large balance on your credit card, focus on improving your cash-flow instead, Stammers said.

You're young. "If you have time to pay off the mortgage, don't bother right away because you can invest in other things and spread the payments out," said Stammers.

There's no reliable income stream. Whether things are shaky at work, or you're burdened by debt, it doesn't make sense to throw cash at a home when you'll likely need that money again, Stammers said. "Most people will get an equity line, etc. and have to take the money back out."

See more on Business Insider:
Living in the Suburbs May Be Making Us Selfish and Wasteful
These Tiny Homes Cost Under $60,000 and Could Help You Save Just as Much
7 Money Rules Explained in Only Six Words

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Man Pays Mortgage in Pennies
Man Pays Mortgage in Pennies