Emotionally, it feels good to reduce the mortgage balance, but as I’ve pointed out many times, what feels good isn’t always right.
Let’s say you owe $200,000 on your mortgage. You refinance, bringing $50,000 to settlement so that your new loan balance is just $150,000. Your new mortgage payment is lower than the old one, but it’s still due every month. If you lose your job, have a medical emergency or encounter any other financial difficulties, you might find making your new mortgage payment just as impossible to do as it was before, with the old mortgage. But if you still had that $50,000, meaning, if you hadn’t given it to the banker when you obtained your new mortgage, you would now still have the ability to make mortgage payments for months, maybe even years.
As you can see, it doesn’t matter how small your mortgage balance or payment is if you don’t have the cash available to make this month’s payment. And that’s just one reason among many others not to prepay your mortgage.
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