It is possible that after a few years you might get sick of making monthly payments on your home. Then it occurs to you, why not put all your extra cash into paying off the home loan. It certainly sounds like a great idea. After all, no one wants to be in debt forever. If you are the average homeowner maybe you should give that idea a second thought.
Unlike other types of debt like credit cards and car loans, the interest on your home loan is tax deductible. So when you look at your mortgage payments, talk to your tax advisor to see what kind of adjustments will be made once you do you tax returns. If you have car loans, student loans and any other type of personal debt, try to pay those down first and then take the cash and put it towards your mortgage.
Take a look at your overall financial picture. If you have any other type of high interest debt, use the extra cash to pay off the outstanding balances on those items before you start putting money towards your mortgage balance. Then you want to look at your investment portfolio. Find out the rate of return on your mortgage if you prepay, since it's basically paying yourself. Then compare it against the return that you get from other investments and this will give a bit more to go on before you decided to funnel extra cash towards the mortgage.
Build up your emergency fund. It is always a good idea to have cash on hand for the little emergencies, but a nice cushion is even better. How long could you continue to make your mortgage payments if you lost your job? If your answer is six months or less, build up your cash reserves then consider paying down other long term debt like your home loan.
So why should you prepay on your mortgage? If your home loan is the last hurdle in you goal to become debt free, pay as much as you can towards reducing the loan. Even if you get the maximum tax right offs nothing can compare to the psychological effect of knowing that you own your small piece of America. Work out a budget with a financial planner or a tax advisor and setup a payment schedule.
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