When you're in your 20s or early 30s, paying on a mortgage loan for the next 30 years can seem almost as bad as a lengthy prison term. One way to "shorten your sentence" is to pay a little extra toward your mortgage each month, a process known as prepaying. Another financial planning option is to stick to your regular payments and use your extra funds to start an investment program. Both strategies offer pros and cons.
One benefit of paying off the mortgage early is that you may be able to enjoy your retirement without the burden of mortgage payments. When you retire, there's a good chance that your income will be lower, which can make it more difficult to make a mortgage payment each month. By paying extra toward the mortgage while you're still working, you can shorten the term of the loan.
On the other hand, by applying extra money to your mortgage each month, you may be missing out on other potentially lucrative investment opportunities. You may be able to achieve a better return by investing an extra $50 or $100 each month into your 401k plan at work. Your employer may match your investment up to a certain percentage, and you'll also enjoy tax benefits like reducing your taxable income and earning tax-deferred interest.
You may be better off sticking to your scheduled mortgage payments if you've taken out a fixed-rate loan (where the interest rate stays the same for the entire loan term) with a relatively low interest rate. If inflation occurs over an extended period of time, you'll still be paying that same low interest rate, providing you with protection against the devalued dollar. Conversely, if deflation occurs, paying extra on your mortgage allows you take advantage of the cheaper dollar.
If you're not one who likes to leave anything to chance, prepaying your mortgage offers the benefit of having your very own crystal ball. By setting up a prepayment schedule and sticking to it, you'll know exactly when your mortgage will be paid off and how much you'll save in interest over time. This can be a major benefit when you're in the process of planning your retirement.
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