The Pros and Cons of Prepaying a Mortgage

December 26, 2018
Author: New England Home Mortgage

If you plan on staying in your home for an extended period of time, you may have thought about prepaying your mortgage. This means you make extra payments in order to pay off the loan before your term is up. There are different options when prepaying a loan: pay an additional amount each month, pay a lump sum (this may happen after an inheritance), or make a 13th payment every year.

Pros of Prepaying
Prepaying a loan can save you thousands of dollars in interest. It will also allow you to pay off the mortgage years ahead of schedule. Here’s an example for a $200,000 loan with 4% interest and a 30-year term:


In this case, you would save $27,037 in interest and pay off the loan five years ahead of schedule. If you know you want to retire or stay in your current home, prepaying could be a good option.

Cons of Prepaying

Depending on the lender, there could be penalties for prepaying a mortgage. Look for the term “prepayment disclosure” in your mortgage agreement to determine if there is a penalty and how much it is. In addition, interest is tax-deductible. When you prepay, you are lowering the interest you owe, which could alter your taxes. Another downfall is if you decide to move. You would have paid extra money without getting the rewards of living mortgage-free.

If you want to lower your monthly payments, you could opt to refinance instead, either to a lower interest rate or a shorter term. Always go through your options with a NEHM professional to decide what is best for you.

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