To Prepay:
Pyschology - You know that owning your home outright in less than 30 years would be liberating and allow you to enjoy life to the fullest

High mortgage interest rate (7-8% or 3% higher than 1 year CD rates). Would be tough to beat with investing.

You would obsess with your investments “beating” your mortgage interest rate too much. You check your investments more than once per week.

Low equity especially if you pay PMI, a
variable rate “piggyback” loan/HELOC, or have an ARM. Each prepayment gets you closer to lowering your overall monthly payment or the opportunity to refinance on better terms earlier.

You don’t have much total yearly mortgage interest compared to your standard deduction - no tax advantages to paying interest.

You plan to stay in your house for a long time

Your emergency fund is of the 6 month rather than the one month variety and your retirement is being fully funded or at least at a level you feel confident about

Not to Pre-pay
Psychology: the idea of a large chunk of your net worth being illiquid and tied to your home gives you nightmares. You like the idea of having a back up emergency fund that doubles as your “beat my mortgage” investment.

Low mortgage interest rate, no PMI, fixed rate mortgage, more than 20% equity with stable home prices in your area.

You enjoy investing and do so for the long haul. You are pretty sure you can “beat” your interest rate and won’t panic if you don’t during a bad year. You are disciplined and won’t touch this money till your mortgage is paid off.

You already have a lot of equity and will pay off your mortgage in the next few years without extra payments. You have a fixed rate mortgage. No matter what you pay in pricipal, your monthly payment will stay the same till the end of the mortgage.

You are in a high tax bracket with an expensive home. Mortgage interest will be higher than your standard deduction for the next few years or longer.

You’ll probably move soon so you won’t really ever “own” this home.

Your emergency fund is not “fully funded” for your needs, you have kids/illness/lots of fear and anxiety. You aren’t quite funding our your retirement plans fully.

So, Like most things in life, there is never a right answer. Just a more right answer for you based on how many of the “To prepay” or “Not to prepay” factors apply. For me, the main factors are that my mortgage scares me and I would LOVE to own my home before I retire (maybe it would even help me retire earlier), I have little equity and an ARM that I would like to be able to refinance, and we plan to live here for a while. So I plan to throw must of by extra money (80%) into the mortgage until I have ~10% equity. Then I plan to split evenly among mortgage, Roth, and savings/non-retirement investing.

I feel so much better just having a plan - one that is based on the numbers as well as my values and goals!

We purchased our modest home 8 years ago. We refinanced twice when the rates were low from 30 years to 15 years to 10 year terms for approximately the same amount of money. I know in 5-10 years or if we have to move that we are going to have to commit some cash to big ticket items that have simply worn out. I want to create the cash flow to do that without debt.

We’ve been pre-paying in bits and pieces, but realized recently we could pay off the mortgage in less than two years without sacrificing our long term financial priorities. We are a childless couple in our early 40’s who have adequate emergency savings, save regularly, max out our retirement funds, and have some smaller investments.

Lots of people suggested this wasn’t the wisest course, since you can get a better return investing, etc. But the thing was, I was looking at the opportunity to upgrade my life in both lifestyle and in expenses. Now, all I pay is my property tax which is $4,100 a year or around $342 a month.

It allowed my wife to quit her job and for us to start agressively saving on just one salary. I have an emergency fund already set up, but since I have no mortage, my bare bones essential living expenses are around $1500-$2000 a month, so I could survive a loss of income for quite a while.

I know that the math adds up a certain way, but living 100%, no doubt about it, debt-free is a feeling that’s worth money to me.

As much as we lost by going this route?

My answer would be yes.

It’s simply not possible to make a blanket statement that applies to everybody. For example, some of your comments don’t apply outside of the USA. Comments below:

“As you prepay in good times, you can’t ask for those prepayments back in bad times or expect favorable treament.”

Actually, I can. My mortgage has enough flexibility to allow me to skip future payments (equal to the amount that I’ve prepaid). Mortgages can vary greatly in their flexibility regarding prepayments and skipped payments.

“The prepayment goes to the backend of the loan. Your $1 pays off the last $1 you’ll pay in the 360th payment.”

Not true. If I pay $1 now, I’m paying off $1 that won’t have interest charged on it for the remainder of the loan.

“no tax benefits.”

I’m in Canada. Mortgage interest isn’t tax-deductible here.

“you are using current money to pay for future payment in 30 years. That is crazy.
Your extra $1000 could be worth $2500 in 30 years. But you get credit for $1000.”

That $1000 you pay now won’t accrue interest for 30 years. Figure out the compound interest on $1000 over 30 years, and you’ll get a lot more than $2500.

I can’t argue with your point #1, but #2 seems like an odd thing to consider “bad.” Taking money off the back-end seems like a good idea to me. By taking a dollar off the 360th month of the mortgage up front, I’m saving 30 years’ worth of interest on that dollar. Depending on how the mortgage interest is calculated, that could be very significant.

[Assuming a 6% APR compounded continuously for thirty years, we get:
I = P * e^(r*t)I = $1 * e^(0.06*30)I = $6.05]

My mortgage rate is about 5.75%, so I look at any extra payment as a guaranteed 5.75% return. So I look at that as part of my portfolio of investments. If my retirement is funded and I have extra money to invest, some piece of it may go to my mortgage as part of a plan to diversify–a chunk of money in higher-yield, higher-risk investments, a chunk of money in no-risk, lower-yield investments.

I like to pay down the mortgage a bit for psychological reasons, but the one big downside already alluded to is that your mortgage is not liquid. Paying it off feels good, but if you haven’t created a cushion with an emergency fund, you could find yourself wishing you could get your hands on some of that money, and the only way to do so is to then get a home equity loan or line of credit, which sort of goes against the point of paying down your mortgage to begin with.

One other note: we shortened our mortgage to twenty years from thirty years while rates were so low because it only added about $100 to the monthly payment. It seemed like a good financial decision at the time because we were making pretty good money, but then our situation changed and our mortgage payment is now somewhat stifling–we still make OK money, but we’ve locked ourselves into paying too much of it toward our mortgage each month. I wouldn’t do it again–it may be satisfying to know our mortgage is getting paid off quicker, but it’s become more of a day-to-day sacrifice than I’d like. It’s not always about the money, sometimes it has to be about your comfort level as well.

You can see the fixed mortgage payment as an enemy or a friend.
With inflation and a buffer in the bank, you can make it your friend. Ask someone who is paying off their 30th year of their mortgage. You may be shocked that their payment is not even half your current mortgage. That is what inflation and a fixed mortgage can do.

We’d rather have the extra money available for home additions, emergencies, or just dropping out. Like when I run away from the computer industry to start a business, or take a pay cut and become a teacher…

Or not. Still, it’s nice to have the buffer just in case the urge arises.

also, the point of the interest % is that you buy time with the interest. time = money. there are very little things in this work that lets you get away with a 30 year payment at only 5%-6%. Ask your brother. Or sister. If you can borrow $100k for 30 years and pay only 5% interest. 5% interest is the deal of the century. Don’t slaughter this golden goose by prepaying it.

1) As you prepay in good times, you can’t ask for those prepayments back in bad times or expect favorable treament.

2) The prepayment goes to the backend of the loan. Your $1 pays off the last $1 you’ll pay in the 360th payment.

3) no tax benefits.

4) you are using current money to pay for future payment in 30 years. That is crazy.
Your extra $1000 could be worth $2500 in 30 years. But you get credit for $1000.

5) only way to undo it is to get a second mortgage.

6) your house appriciates or depreciates whether you prepay or not. so it’s meaningless.

7) you can do better things with $1000 than to prepay. You can put that $1000 in a 10 year bond or CD and use that $1600 to pay one payment in the 10th year.

the only reason to prepay is if the interest rate enviroment is oppressive and you can’t get a deal in a bank and you are set financially and don’t really care if you win or lose a few thousand. If you won the lottery and can’t remember to make payments every month because you are always on travel.

I prepay my mortgage in two ways:

1) I’m on an “accelerated biweekly” payment schedule, with payments made automatically every two weeks on my payday. This schedule means that every two weeks I pay one-half of a “standard” monthly payment. In a year, I’ll make 26 of those payments, or the equivalent of 13 monthly payments in 12 months.

2) I pay an extra $100 toward the mortgage with each payment.

The combined result of these options is that my mortgage, originally amortized over 25 years, will be paid off in approximately 15 years.

I’ve never understood why people would want to pay a mortgage monthly when they usually receive their paycheques every two weeks. I find it much easier to budget things when the regular bills coincide with the regular paydays.

However, if you’re wanting to stay in the area, move up to a larger house, and maybe keep the house you have now for rent - then it might help not to have so much borrowed money on your new rental property. Buy paying off the bulk of your mortage, you can be more flexible in the rent that you offer.

Just a thought.

I’ve heard a couple a few different methods for accelerating mortgage payments. The first, and most common, is to just make an extra mortgage payment once a year. The second, which is a variation of the first, is to take this extra mortgage payment and divide it into twelve equal installments, and to pay this every month. I’ve also heard the suggestion that you just pay 10% extra every month.

Givens’ suggestion is novel because what he’s saying is that *every* month you should pay one extra installment on the principal. At the beginning of the loan, this will be a small amount. But as time progresses, this amount will increase.

Actually, his method is slightly more complex than this. I tried to simplify it for this entry. I think that it’s worth an entire entry on its own, though, so I’ll try to post it in the next day or two…