With mortgages being the longest-lasting debt for most Americans, paying that obligation off early is tempting. And if you consistently have money left over after paying bills each month, investing some of that surplus in your mortgage can indeed be a smart move.
But whether it’s wise given your particular situation has to start with whether your mortgage allows it. Penalties for prepaying your mortgage were fairly common in the 1990s and early 2000s. They’ve since fallen mostly out of favor, but some lenders still impose them, especially for subprime mortgages.
So your first smart move before paying anything beyond your monthly obligation is to check your closing documentation or call your lender to find out if any type of prepayment penalty is stipulated. This is also a good question to ask if you’re currently considering a new mortgage.
Once you’ve held a mortgage five years, the chances are high that you’re safe from prepayment ramifications. That’s because the bulk of prepayment penalties target payoffs during the first two to five years of the loan. Paying off the debt in those early years by selling the home or refinancing can trigger the penalty.
But if you’re beyond the five-year marker, or are your using a lump-sum inheritance or other windfall to pay off some, but not all, of your mortgage, most lenders will take no issue with this prepayment. Similarly, adding a little extra to your payment every month or making 13 mortgage payments a year instead of 12 also typically doesn’t incur any penalties.
Whether mortgage prepayment makes sense for you depends on a variety of factors we’ll address in a future article. But no matter that conclusion, understanding the rules in place on your current mortgage – or a new one you’re considering – is a critical move.