THREE QUESTIONS TO ASK YOURSELF BEFORE DECIDING TO PREPAY YOUR MORTGAGE

Just prior to the "Great Recession" of 2007, a study by the Federal Reserve showed that 16% of homeowners prepaid their mortgages annually. However, compared with other types of debt, mortgage debt is one of the most reasonable and affordable types of debt. For example, mortgage interest rates are usually around 5%. Meanwhile, a credit card's APR can exceed 13%.

None the less, the ability to pay off a mortgage early is a major financial feat, especially considering the current economic climate. According to Freedom Debt Relief, a financial services and debt relief company, some homeowners are considering early mortgage pay off due to flat home values and declining revolving debt.

The company points out that an early mortgage pay off is usually considered a good financial move. Obviously, the loan debt will be eliminated faster and you'll pay less in interest over the life of the loan. This can be financially beneficial when a homeowner plans to stay in their home for an extended period of time.

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On the other hand, there are certain situations where it might not be the smartest financial move. For example, someone that has other large debts, such as credit cards, or that is planning a housing move within the next couple of years might not benefit from an early mortgage pay off.

Those considering an early mortgage pay off should ask themselves three questions to determine if it will be a good move:

1. Are there prepayment penalties in your mortgage contract? A prepayment penalty is the fee that a lender may collect if you, the borrower, pay the loan off before it matures. Be sure to read the Truth in Lending disclosure of your home loan to find out if you have a prepayment penalty and what the penalty will entail before deciding to pay off a mortgage early. You might also consider what point in the life of the loan you're planning the prepay. Clearly, the earlier you prepay, the more interest dollars you'll save on the life of the loan. It's likely that you won't realize any interest savings if you're faced with a hefty prepayment penalty late in the life of the loan.

2. If you prepay your mortgage, would it mean sacrifices to either your long or short-term financial health? For example, would an early mortgage payoff be at the expense of your long-term saving goals, retirement funding, or paying other debts? Most financial experts recommend not to prepay a mortgage until you have an emergency fund to cover your living expenses for six months -and- are able to prepay and still meet your other financial goals.

3. Are you planning to move in the near future? Buying a home is a process that most often requires a sizable down payment. The days of a 5%-10% down payment for a home mortgage are fading quickly. Lenders in many areas of the country are routinely demanding larger down payments due to the still wobbly housing market. Regardless of what the lender requires, you'll still generally need a down payment of 20% or more to get the best rates. Therefore, using all your cash reserves to prepay a mortgage might not be the best financial move if you'll be moving soon and need a large sum of money for your down payment.

Although you might really want to get out from under a monthly mortgage payment and fully own your home, you shouldn't risk your financial security to do it. Our financial advisers can help you determine if prepaying your mortgage is a financially prudent move, or if you might be better served to put the funds into a retirement fund.

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