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Should I pay off my mortgage early?

prepay mortgageUpdated by Craig Berry

If you have a mortgage, chances are you are counting down the months and years until your home loan is paid off and you own your home free and clear.

Some homeowners are so eager to get rid of their mortgage that they pay extra money to rid themselves of the mortgage debt faster. Paying mortgage payments in advance, known as prepaying, can help you build equity faster, ultimately saving you thousands of dollars in interest charges and helping you become mortgage-free sooner.

Paying mortgage payments in advance

HSH.com conducted a survey with homeowners between the ages of 18 to 64 to determine if they planned to prepay their mortgage and why.

The nearly 800 respondents, comprising about the same number of males and females, were split fairly evenly between those who said, yes, they planned to prepay their mortgage loan and those who said, no, they didn't plan to prepay their mortgage. The survey found that 52 percent of male respondents said they plan to prepay their mortgage compared to 48 percent of female respondents.

In terms of age, 30 percent of homeowners age 40 to 49 said they planned to prepay their mortgage loan, the largest percentage of any age group.

Most people decide to prepay with "some noble goal in mind," says Keith Gumbinger, vice president of HSH.com in Riverdale, N.J. The most common reasons for prepaying are to retire a loan sooner to save on interest costs and to build equity faster.

Can you prepay your mortgage?

Paying off the mortgage might take some time since 64 percent of respondents said they originally obtained a 30-year loan. Twenty-six percent said their original term was either 15 or 20 years, and only 7 percent of respondents said their loan was over 30 years.

Respondents aged 18 to 29 were more likely to have a loan with an original term of only 15 or 20 years, while respondents aged 50 to 64 were significantly more likely to have originally obtained a traditional 30-year loan.

Seventy-two percent of the women surveyed said they'd originally obtained a 30-year loan as had 55 percent of the men surveyed.

Best way to prepay mortgage

While many homeowners have the desire to prepay their mortgage, prepaying takes more than good intentions. Discipline and time are necessary to prepay mortgage loans.

There isn't necessarily one best way to prepay mortgage loans. People prepay their mortgages in a variety of ways; here are three common approaches that work well:

  1. Pay a little extra each month, saving thousands, and even tens of thousands of dollars over the life of the loan.
  2. Set up bi-weekly payments. This technique leads to one extra payment per year, compared to the traditional 12 payments you would normally make.
  3. Make one extra payment per year. This may be a great for those fortunate enough to receive a tax refund or annual bonus.

What happens when you prepay mortgage principal

Prepaying the principal of your mortgage can save both time and money. The following example shows how of each you could save if you prepay your mortgage on a $200,000 loan at a 4.75 percent interest rate on a 30-year fixed mortgage.

Payment Method

Pay Off Loan

Total Interest

Total Interest Saved

Minimum each month

In 30 years

$164,813

$0

13 payments per year

In 25 years, 4 months

$136,111

$28,702

$100 extra per month

In 24 years, 9 months

$133,068

$31,745

$150 extra per month

In 23 years, 0 months

$121,068

$43,745

$200 extra per month

In 21 years, 3 months

$112,058

$52,755

HSH's mortgage calculator can help you figure out the impact of extra payments being applied to your mortgage. You can then click on "Amortization schedule" to show the section detailing the exact amounts being applied to principle and interest each month.

Gumbinger also recommends running your numbers through a roundup prepayment calculator to give you a sense of the impact a few extra dollars each month can have on your overall interest expense.

Should you worry about a mortgage prepayment penalty?

Most residential mortgages today don't have prepayment penalty clauses, but you should definitely contact your lender to be certain of your contract details. While it may not be necessary to be concerned about a mortgage prepayment penalty, there are other things that might be worth worrying about.

For some homeowners, paying off their mortgage is a high priority. For others, it's barely a blip in their financial plan, says Ronit Rogoszinski, a financial planner and wealth advisor at Arch Financial Group on Long Island, N.Y.

Whether prepaying makes sense is "a good question to ask," though the answer depends on your individual financial situation, Rogoszinski adds.

"You need to look at your total financial picture. Do you have a will? Do you have health insurance? Do you have life insurance? Are you funding your retirement plan? If there's a missing link that you've neglected, maybe that's the thing to do this year versus making that extra mortgage payment. If all the basics are done, then you need to start running the numbers to figure out what makes sense."

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