Should You Prepay Your Debt?

The faster you pay off a loan, the better off you are financially right? Not necessarily. Be sure to be informed about finances loan before you prepay your debt.

If you are thinking about prepaying a mortgage, be sure you understand that most mortgages are set up with you paying more of your monthly payment is interest at the beginning of the loan’s term with the principal paid toward the end. If you pay down your mortgage with a lump sum or a little extra every month, it can benefit you financially. You’ll decrease the amount of principal you owe, build up principal and even shorten the term of your loan. You’ll also end up paying much more interest.

Although prepaying is a good deal for many people, be aware that if this money won’t be available for anything else. If you need money in a hurry, the cash you are using to prepay your mortgage isn’t available. Some investments would earn you more money than the interest you are saving by prepaying.

With some loans or mortgages, you may be charged a prepayment penalty. Be sure to find out before you prepay your loan. Do the math to make sure the amount you save with prepayments will be more than the penalty. Some loans, especially vehicle notes, follow the Rule of 78s, which penalizes you for early payment by loading all of the interest in the first year or two of your loan.