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Your Bank > Education and Advice > CNB University

Paying Off Your Mortgage Early

Have you thought about adding a little more to your mortgage payment each month? It might be a good strategy for you. In most cases, paying extra on your mortgage each month would save you interest and help you pay off the loan sooner. But, before you add more to your payments, look closely at your loan's interest rate, your tax situation, and your complete financial picture.

Interest Rate

When you prepay your mortgage, you in effect earn the mortgage rate on the extra money you pay. For example, if your interest rate is 9% and you decide to add extra money to your monthly payment, your pre-tax earnings on that extra payment would effectively be 9%. This means that you would be better off prepaying your 9% mortgage unless you could earn more than 9% by investing that extra money elsewhere. So, compare your mortgage rate to the rate you could receive from an alternative investment before prepaying.

Tax Consequences

If you itemize income-tax deductions and fully deduct your mortgage interest, you might not want to prepay your mortgage. By paying extra each month, you will be paying less interest overall and, as a result, your interest deductions will be reduced. In deciding whether to prepay your mortgage, you'll have to consider the effect of lower interest deductions on your income taxes.

Other Financial Conditions

Even if you decide that you can't get a better return by investing your extra money elsewhere and you don't mind a smaller interest deduction, there are still other factors to consider before prepaying your mortgage.

Everyday Expenses. Make sure you have enough money for your everyday living expenses. Only money that you have in excess of your living costs should be used to prepay your mortgage.

Other Debts. If you have other debts at a higher interest rate than your mortgage, such as credit card balances, personal bank loans, and auto loans, you should pay off the other debts before your mortgage, especially since the interest on those debts is generally not deductible.

Emergency Fund/Savings. You should have an emergency fund set up before you prepay your mortgage. If you will have to finance your children's college education or you are planning to retire soon, you may also want to build up your savings instead of prepaying your mortgage.

Other Options. You might consider refinancing your mortgage. If you can secure an interest rate lower than your current mortgage interest rate, refinancing could save you a substantial amount in interest charges and reduce your monthly payment.

If you are a current CNB Mortgage customer, you may be eligible to streamline your current mortgage at substantially lower costs. For more information please contact one of our Mortgage Professionals at (800)724-2621 or (585)394-4260. For the Canandaigua areas please call (585)394-9100.