When Prepaying Your Mortgage Is Wise

On a 30-year $100,000 mortgage with a 10 percent interest rate, an extra payment of $31.13 a month would save you $43,309 over the life of the loan, and it would be paid off in 25 years.

If the same mortgage carried a 13 percent interest rate, extra payments of only $21.64 would result in the mortgage being paid off in 25 years and a savings of $59,890.

These figures come from the book, A Bankerís Secret, by Mark Eisenson, an advocate of mortgage prepayments.

Some financial analysts say that prepaying isnít a good idea if you can earn more on the money by investing it elsewhere, or if you have debts at a higher interest rate. For example, if you had a credit card debt carrying an interest rate of 18 percent, that should be paid off first. The same idea applies to car payments and other loans where the interest rate is higher than the mortgage. Pay those off first.

There is one more factor to consider. If you think you can afford to pay $25 or $50 a month extra on your mortgage, but would otherwise just spend that money anyway, making the extra payment makes good sense.

Prepayments donít save much interest if you only keep the house for a few years, but they do build equity that you get back when you sell. The big reward in prepaying is owning a house free and clear at some time in the future. If this appeals to you, add something extra to your mortgage payment and youíll own the house sooner.

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