Early Mortgage Payoff
by Takara Alexis

Some loans include a mortgage prepayment penalty if you pay off your mortgage too early. Many mortgages penalize you if you pay more than a certain percentage of your scheduled payments in a year. Others penalize you if you pay even a single dollar over your scheduled mortgage payments. Before you begin sending extra mortgage payments,look into your loan documents to make sure there is no penalty.

If you have any credit card debt, you should be focusing on paying it off before thinking about paying off your mortgage early. Credit card debt is usually more costly to carry than a mortgage because it contains a higher interest rate. All in all, you aren't saving much money if you pay off you lower- interest rate mortgage and leave a balance on higher interest rate debt.

Paying off your mortgage might also leave you without a tax benefit if you are in a higher tax category and you owe more than 15 years on your mortgage. You should talk about the tax implications of paying off your mortgage early with your tax preparer.

Before paying off your mortgage you should weigh the other options. What would happen if, rather than sending an additional mortgage payment to the mortgage lender, you instead invested the money each month. If the investment has a higher interest rate than your mortgage, you would after a while, earn more money with the investment than you would've saved on the mortgage. In addition, if your mortgage has a higher interest rate than investments, it's a better choice to pay off the mortgage.

For example, let's say you have 15 years left on a $200,000 mortgage at 6.25%. You decide to put an extra $600 a month toward your mortgage. You would end up saving $36,574 in interest and your mortgage would be paid off in just over 8 years. Let's say at that point you start investing your entire mortgage payment including the extra $600 for the 6 years you had left on the mortgage. When 6 years is up, you would have $173,000 from your investment.

Consider the possible choice of not paying your mortgage off, but investing the extra $600 every month at 8% for 15 years. You would end up with $209,000. That's $36,000 more than you would have earned if you'd paid your mortgage off early.

The investment alternative only works if you are constantly investing every month and the interest rate on your investment is larger than your mortgage. If you invested at 5%, you would have missed out on $11,000.