Can you — and should you — prepay a mortgage loan?

Buying a new home is exciting. But having to pay off that loan can get real old real fast, especially since it can take decades to pay off. That can be depressing for first-time homebuyers who probably have multiple financial challenges — car loans, school loans, credit cards, and smaller starting salaries early in their careers. Luckily, they probably also still have plenty of time to earn and invest.

Still, it's tough to watch most of your scheduled payments go to cover interest, and very little goes towards reducing the principal during the first few years of your mortgage.

With so many other bills to pay, many borrowers lack the motivation to speed up mortgage repayment. It's usually at the tail end of a loan's life when homeowners are more willing to pick up the pace to shorten the time it takes to be mortgage-free.

This blog will look at whether there really is a benefit to chipping away at a mortgage throughout the life of the loan and give you a few options of how to do that.

Ask yourself these 6 questions

Mortgage prepayment pros and cons depend on what's important now — and what will be important in the future. If you're debating paying off your mortgage sooner than planned, consider asking yourself these six questions:

1. What happens if you have an emergency? Before deciding to pay your mortgage off a little bit early, think about a worst-case scenario. What if you needed extra cash to replace your roof or repair a tired HVAC system. If you don't have funds you can tap into, an emergency cushion, so to speak, you could find yourself borrowing emergency cash at a higher interest rate than you're paying on your home loan.

2. Are you budgeting for retirement? Even if you're still relatively new in your career, maxing out your retirement savings should be a top priority, especially if your employer matches part or all of your contributions. This might be a smarter move than putting a little more towards your mortgage. As always, you should meet with a financial planner to discuss investment options that work best for you.

3. Got kids? What about their education? College tuition isn't getting any cheaper. And daycare is already obscenely expensive. If you have kids — or are planning a family — consider putting money into a mutual fund or other investment that's protected from state and local taxes.

4. How will you pay off other debt? Before deciding to increase your monthly mortgage bill, focus on paying off other obligations and try not to take on new debt. When you consider how quickly interest rates and additional fees can cause credit card bills to skyrocket, it might make more sense to pay off your credit card before adding an extra $$ to the mortgage. As of January 2021, the average credit card interest rate was 17.9%. That's a lot higher than the typical interest rate for mortgages Over the last few years.

5. What about taxes? Paying your mortgage off early might be a boon to your savings, but you'll lose any tax deductions you might get on mortgage interest. Ask your tax advisor about tax implications that might kick in after paying off your mortgage.

6. Will the terms of your mortgage allow for pre-payment? Before you attempt to pay off your mortgage early, be sure to review your original loan documentation. Some lenders accept extra payments only at specific intervals, while others may charge prepayment penalties. This could stop you from moving forward before you even get started.

How to pay off a mortgage ahead of time

If, after answering the questions above, you decide that paying off your mortgage early is the right move for you, there are several ways to go about it. Here are some examples of how you could move towards an early mortgage payoff.

MAKE A 13TH PAYMENT EACH YEAR

Making one extra payment every year will reduce a 30-year loan to 25 years and 11 months, saving you four years of principal and interest payments. Just divide your monthly mortgage amount by 12, and tag that amount onto each month's payment. So, if you pay $1350 each month, add $112.50 (1350 divided by 12) for a total of $1462.50. Either that or make an extra $1350 mortgage payment once a year to have the same effect on your amortization schedule.

Make sure your loan servicer knows that you want that extra payment to go towards the principal, not to the interest, and check the next month's loan statement to confirm it went through as intended.

ROUND IT UP EVERY MONTH

If an extra monthly payment each year knocks your budget out of whack, try rounding up. For example, take that $1350 monthly payment and round up to $1400. The extra $50 isn't a lot, but it will still bring the amortization schedule down by a year or two.

ADD A LUMP SUM PAYMENT

Let's say you get a bonus at work or a sweet refund on your taxes. Putting some of that towards your mortgage does the same thing: it reduces the length of your loan and cuts the amount you pay in interest. Do this several times over the life of the loan, and you'll own your home outright even faster.

BAKE IT IN

Some lenders will let you set your payment above the minimum required from the start. Let's take the example we have above and use that hypothetical $1350 mortgage payment. Ask your lender to issue you mortgage bills of $1400, rounding you up automatically. The good thing is you'll get used to this higher mortgage amount pretty quickly. But one word of caution: once the overpayment is built into your mortgage contract, it isn't easy to undo, so make sure it's something you can live with for the life of your loan.

REFINANCE TO A SHORTER TERM

Refinancing is an option only if it makes financial sense, and you should talk to your loan officer to work the numbers. Sure, you can refinance a 30-year, fixed-rate mortgage to a 15-year loan, but the interest rate needs to work in your favor. You may pay off that mortgage years earlier and save a boatload in avoided interest payments, but you have to factor in that you'll end up paying additional closing costs.

Additionally, refinancing is less flexible than making extra payments. Once you refinance, you're once again stuck with a set payment for the life of the loan.

There's a lot to consider

If you're a first-time homebuyer, paying off your mortgage seems like a lifetime away. But if you start early in your mortgage's life cycle, or better yet, before you buy, a little extra prepayment can get you to being mortgage-free sooner than you thought.

It's a big decision — one that could give you more freedom down the road but limit your financial flexibility along the way. Speak with a Movement Mortgage loan officer in your area to review your goals, calculate your potential savings, and determine if an early mortgage payoff makes sense for you.