Is it smart to prepay your mortgage? These are the three different approaches to paying your mortgage that work for homeowners and investors.
Q: I’m 83, have no mortgage, pay my credit cards in full each month and have no car payment. When I first started out in 1961, I bought a 52 chevy for $195 and drove it for years. When I got my first house with a mortgage, the early payments were mostly interest and little principal. So with each payment I added the principal amount of the next one or two payments. Voila, I just saved a lot of interest and shortened the life of the mortgage for not much money. Later when the interest portion of the payment became smaller I just made the regular payment. But I saved thousands in interest for a small sacrifice.
I just wanted to share my story so that millions of Millennials and Gen-Zers will know it’s okay to build wealth over time.
A: Thank you for your story. Recently one of our columns touched on whether a homeowner should make extra payments on their mortgage or use that money elsewhere. When it comes down to people and money, there are different approaches that can work.
Is It Smart to Prepay Your Mortgage?
First, there are super-conservative investors who like cash. No matter what happens, they want their money in cash and have it be available should an interesting opportunity present itself. For these people, they would prefer to pay off their mortgage faster than pay interest on their loan. They see savings in not paying that interest to the lender. On the other hand, they may not be as keen on investing in the stock market and researching equity investment opportunities.
Next, there are investors who like to leverage up as much as possible. These homeowners prefer to leverage their home (borrow from their equity in their home) and invest the money. Their belief is that by investing the money they can make far more money than if they keep the money in cash or in the equity of their home. They tend to have brokerage accounts and watch the stock market and may be active, even obsessive, investors. They want to make their cash work as hard as it can for them.
Finally, some investors are a combination. They’ll take some risk. They’ll have some cash on hand, and depending on how a year goes, that ratio may shift one way or another. The thing is, there’s no one right way to invest your money. Everyone has to be able to sleep at night.
Be True to Your Nature
Based on your question, you appear to probably fall closer to the combination. When we come across people like you, we encourage them to be true to their nature. We tell them: Pay off your home as quickly as possible. You value the investment and equity you have in your home and it gives you pleasure and peace to know that your home is paid off.
Prepaying or paying down a mortgage is certainly not for every homeowner. In your situation, clearly, it was good for you and you are glad you did it. Having said that, we know from past letters that there are quite a number of our readers that feel the opposite and would never pay down a loan like you did.
We don’t think there is a wrong or right answer here but rather a right answer for each type of homeowner and investor.
More on Topics Related to Is It Smart to Prepay Your Mortgage?
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