Why you should (or shouldn’t) prepay your mortgage

I’ve been writing about prepaying my mortgage for about 18 months now. Some people have asked me why I’ve done that, instead of paying that money to my student loan, investing it or just not doing it at all?

There are several things to consider before you prepay your mortgage;

– do you have other debts at higher interest rates that take priority?
– do you have a very low interest rate and what is the current rate of inflation
– your mortgage term, are you locked in or do you have a variable rate and most importantly;
– are you able to and do you want to prepay your mortgage?

I address my financial issues not only from a logical perspective; do the numbers add up? But also from an emotional perspective. I do things because they motivate me, bring me peace and propel me to do better financially

So why should you, or should you not prepay your mortgage?

It’s not just about numbers. Mortgage debt is often considered ‘good debt’ and it is commonly accepted to just stick with the payment for X years. A mortgage is a fact of life, right?

Mortgage debt

It doesn’t have to be. I don’t think that way: I want to be completely debt-free and my mortgage is just the next obstacle to tackle on my way there.

Usually, there are several ways people go about debt-repayment

1. You stick with the payment handed to you by the lender and pay the loan off through the agreed upon term
2. You snowball your debt; paying the smallest balance first, then the next smallest etc. or
3. You pay of your highest interest debt first, then the second highest etc.

It’s true that when you have a list of debts at varying interest rates, tackling the not-so-bad-debt that is a mortgage may not make sense and hey… if you’re paying 21% interest on a credit card and only 5% on your mortgage… it would be really stupid of you to start prepaying your mortgage rather than pay off debt. But once you start getting down to the bigger balances with similar interest rates, what do you do? Are you at a point where I am where all you’ve got left is a mortgage?

Making the choice to prepay or not to prepay your mortgage is a very personal decision and it’s not easy. You should lay out all your options and ultimately choose the decision that works out best for you financially as well as emotionally. It makes absolutely no sense to do something that you don’t have to that will make you miserable, even if the numbers add up.

Prepaying your mortgage will save you handfuls of money by shortening the compounding period of your mortgage and ultimately the total amount of interest you pay. BUT you should also consider the effects of inflation and some of the other issues I outlined above. Prepaying YOUR mortgage might not be the best option for you.

Why I decided to prepay my mortgage

My mortgage is the last BIG loan to tackle and has a 5.35% fixed rate for 5 years. I made my first mortgage prepayment in August 2010 and have thrown an extra $100 payment at my mortgage every month since then. This means I paid $1,800 extra towards my mortgage over the past 18 months, had I not done that that I could have paid off my student loan about two months sooner since I was paying BOTH loans instead of just focusing on one and making minimum payments on the other, but I stuck with it anyway because of this powerful word:
Motivation.

Every person is motivated differently and only you will know what works best for you and what will keep you in it for the long haul.  Once my credit cards were done I felt daunted by my student loan. Have you ever felt like that? Having just paid off a $5,000 credit card, my next debt; a $16,000 student loan seemed like a HUGE mountain I could never climb. Instead of continuing to feel daunted I decided to find a way to keep myself in the game, to stay motivated and to just keep going.

I realized that I got a kick out of seeing the prepayment on my mortgage make a difference on my principal balance and especially seeing the amortization period shortened by as much as three months for one $100 payment. So I stuck with it, I focused on throwing that extra $100 on my mortgage every month and made an effort to put every remaining penny on my student-loan.

Check out this interesting illustration about drive and motivation

I kept myself motivated by finding a way to stay interested, debt can be a beast on your back that’s hard to shake and a cut and dried method of paying it off may not work for you. That’s okay! Just seeing the math makes sense wasn’t enough for me. Find what motivates you and just keep going. ..

It’s been 18 months but I’m almost there, today I owe about $500 and in a few weeks my student loan will be completely paid off.  In the end I kicked my debt to the curb doing it the way that worked best for me.

How about you, what motivates you?

PS: IMG source here.

 

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7 Comments

  1. I like this video. This is the second time I've seen it, and I still watched it all the way through. I gave up my finance career 11 years ago, so it's not all about the money for me 🙂

    • Same here, I ran into it again and watched it start to finish… I rarely do that, it really is a great video. What did you do in finance?

      • I was a credit analyst, mainly. Working in the automotive industry we had car dealers as clients, as well as their retail customers. I would review dealership credit accounts and make sure everything was in order. Structuring dealership acquisitions and mergers was as fancy as it got for me. Lots of stress!

  2. Paying down a mortgage is generally a great idea unless you have the opportunity to generate more cashflow from another investment.

    You cannot write off interest for a mortgage but you can for an investment.

  3. We have been paying extra on our mortgage since we bought our house 7 years ago. Just $100 a month and then $1,000 at the start of each year. It's cut 4 years off the mortgage so far and it's been fairly painless.

  4. We do an extra $100 a month too. It is fun looking at the amortization schedule go down. In a few years (three or four) I hope to be focusing on our mortgage debt and pay it off within 10 years. That's the plan anyhow.

  5. This was my first time viewing this video. I heard of the M.I.T study before but the video made it worth it to view/read about it again. I refinanced my mortgage from a 30 year to a 15 year and I'm about to start paying extra. I guess I want to see my mortgage go 🙂

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