Should I Prepay My Mortgage?

You’ll typically hear two different arguments here, and I’ll sum them up quickly without getting into the math:

1. You shouldn’t prepay your mortgage. You should invest the money instead because with loan rates so low, it’s feasible to outpace the interest rate with your return. Plus, your mortgage is a tax deduction.

2. You should prepay your mortgage. You’re guaranteed to save money over the long-term, whereas funds that are invested could actually lose value. Even though you’re reducing your tax deduction, you’re still guaranteed to come out ahead.

Most people with a lower risk tolerance fall into the second group. However, there’s one thing to consider that many people overlook…

Once you use funds to prepay your mortgage, that money is inaccessible until you sell your home or take out an equity loan (which you’ll be charged interest on, of course). In the event that you lose your income, the fact that you’ve prepaid your mortgage is of no use to you. Your mortage company will still want the regular monthly payment, and you’ve got to keep the lights on and the water running. The last time I checked, the electric company still won’t accept bricks from your home’s exterior as a payment. It is much easier to sell something that is conservatively invested than it is to sell your home and find a new place to live.

But, does that mean you shouldn’t prepay your mortgage? Not at all. What I’m suggesting is that you find some balance here. Instead of going all one way or the other, considering sending in a small amount of extra cash to pay down your mortgage a little faster, and put the rest somewhere that is easier to get to in the event that you need it.