Would you like to earn 8% or more on your money, guaranteed and risk-free? Like to trim your future expenses so you can retire early? Want to save thousands of dollars in interest expense?
One simple investment can do it all: prepay your mortgage.
To trim five years off a 30 year, 8% mortgage of $100,000, increase your $734 monthly payment by $38. If you can afford to pay an extra $100 a month, you’ll knock off ten years instead of five, and save $64,000 in interest over the life of the loan. That’s a pretty good return on just $24,000 of extra payments.
The higher your mortgage interest rate, the more sense it makes to prepay your mortgage. If your interest rate is low, you may want to invest in growth stocks or mutual funds that have the potential for a higher return over the long term.
Weigh that potential against the guaranteed savings you’d get by prepaying your mortgage, to see which makes most sense for you. If you have $100 extra each month, maybe $50 toward the mortgage and $50 into a growth mutual fund is your best strategy. (To learn more about investing small amounts of money, read The Way to Invest by Ginita Wall.)
Pay off your credit card debt before you begin to make extra payments on your mortgage. You’ll save the most by reducing the debt that has the highest interest rate. Besides, your home mortgage interest is deductible, and your credit card interest isn’t.
Don’t be afraid to pay down your mortgage because you’ll lose a valuable interest deduction. Your interest deduction probably saves you only 15% to 28% on your federal tax return, so you are footing the bill for the difference.
And if you invest your extra money instead of prepaying your mortgage, you’ll pay taxes on the earnings. Your taxes will remain the same, whether you prepay the mortgage or invest the money at the same taxable interest rate.