Smart mortgage move
When prepaying makes good sense
If you want to own your home outright, prepaying your mortgage can be tempting. Doing so potentially could save you tens of thousands of dollars in interest and years of monthly payments.
Here's when the move can be smart:
If you are taking care of your major financial responsibilities, you're a good candidate for pre-paying your mortgage, according to Keith Gumbinger, vice president of mortgage information publisher HSH.
Especially if you think the extra money you put toward your mortgage will give you a better after-tax "return" than if you invested it in the stock and bond markets.
Here's how Gumbinger recommends figuring out that after-tax return: Multiply your mortgage rate (say it's 8 percent) by the inverse of your tax bracket (if you're in the 28 percent bracket, the inverse is 72 (100-28)). So in this case prepaying your mortgage is like getting a guaranteed after-tax return of 5.76 percent (0.72 x 8).
(Here's when it's not a great idea.)