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Reasons to Not Prepay Your Mortgage

There are detriments to prepaying your mortgage. One such detriment would be that you would be spending cash that could decrease your financial liquidity.

If you currently have an old mortgage with a low interest rate and low balance that you payoff, you may not be able to get the same financing terms down the road if you decide you need to pull out money from your house. Once you payoff your loan and try to take out a new mortgage it will be for another 15, 30 or 40 years before you will payoff that mortgage.

Although there are downsides to prepaying your mortgage, there are also benefits. Most homeowners don't like making that monthly payment, and they don't like the feeling that a bank technically owns their home. Once the mortgage is paid off, the home is yours free and clear. All you are obligated to pay in housing costs at that point is property taxes, though homeowners insurance is always a good idea as well.

Most of a homeowner’s money is made on appreciation and not prepayments on the loan. Most investors put as little money as possible in a home in order to control more homes to get more appreciation.

You need to make sure you ask questions about prepayment penalties when you are obtaining a mortgage. A pre-payment penalty is something that is charged by some lenders if their loans are paid off within a certain time-frame. A prepayment penalty also can be charged if you prepay too much during the course of a year. An example is, some lenders may penalize you if you prepay your home loan by more than 20% of its original balance during any one year for the first 3 years.

Prepaying your mortgage will eliminate the tax deduction you gain by paying interest on your mortgage. This can have a negative overall affect. You should consult with your CPA or accountant on this issue.

If your money can produce net returns of more than the interest rate on your mortgage, you should not pre-pay your mortgage.


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