Pros and Cons to Prepaying Mortgage Loans

[Jan 10, 2009.]

 

Does it make sense to pay off a mortgage early in these tough economic times? Many financial experts caution against prepaying mortgage loans, but there may be situations where it makes sense. A Wall Street Journal article outlines some pros and cons to prepaying a mortgage.

Paying off a mortgage early may not be ideal if for someone who needs to get their hands on cash in the near future. Even if they don’t need money now, a future emergency or job loss could completely change their financial picture. People who still want to prepay their mortgage should build up a savings of at least six months of living expenses first.

Make sure the mortgage loan doesn’t have a prepayment penalty. Check  mortgage documents or call the loan servicer to get the details.

Prepaying a mortgage loan might cut into funds that could be used to boost retirement and investment accounts. Even with recent losses to the stock market, many people will still come out ahead in the long run by investing their money rather than paying off a home early.

People who have adjustable rate mortgages (ARMs) could benefit from prepaying because the lower principal balance will be used when it resets.

It could also be smart for someone to prepay their mortgage if doing so will help them reach 20% equity in their home and cancel private mortgage insurance (PMI). 

In some cases, prepaying a loan could lower a jumbo mortgage to conventional levels. In that case, a homeowner might be able to refinance at a lower mortgage rate.

When deciding whether or not to prepay a mortgage it’s important for a homeowner to examine their entire financial picture. Consulting a financial adviser can help put everything in perspective so that whatever decision is made, there won’t be any regrets down the line.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.