>> Ric Edelman's Answer on Pre-Paying Your Mortgage

Here's a question I haven't seen answered. I am about three months ahead in paying my mortgage. Is it smart to pre-pay the mortgage? Or should I place these monies into stock/bond purchases? I like paying the mortgage a few months in advance for security purposes, plus I like the larger interest tax deduction I will get for 2006.

No, you're not doing a smart thing. First, your strategy doesn't work. You can only deduct the interest on 13 payments per year, even if you make more payments than that. Thus, you are not going to get the tax deduction you expect.

Second, paying your January payment the prior December (the 13th payment) only works in the first year. That's because next year you'd have only 11 payments to make. Thus, your idea increases this year's tax deduction by decreasing next year's deduction. The only solution to that is to make additional payments at the end of the next year, too---- and suddenly, you're in a cycle of higher costs with minimal benefits.

Third, you're not reducing the principal as fast as you think. Instead of paying off the loan in 30 years, your idea will terminate the loan in maybe 29 years. Whoopee.

Fourth, you're giving your money to the lender before the lender has asked for it. You'd be much better off investing that money where your might earn a higher return than what the loan costs you and where, more importantly, your money will remain available to you.

Fifth, you're not boosting your financial security at all. In fact, you're reducing it--- which is ironic, considering your objective. You see, the lender wants this month's payment this month, and it wants next month's payment next months. If you send two payments this month, you still have to send in next month's payment; the extra payment you make this month does not absolve you from having to make next month's payment. ( The extra payment simply reduces the overall balance, meaning your loan would end in 29 years 11 months instead of 30 year.) And that extra payment, as noted above, is not tax-deductible. So when you give the lender several month's worth of payments right now, all you do is reduce your cash-on-hand. If you suddenly lose your job, suffer a medical problem, incur a major expense such as a car purchase, you could find yourself low on cash---- all because you'd already given your cash in pointless pre-payments!

So the irony (in case you haven't figured it out) is that you could make yourself so cash- poor that you are unable to make the monthly payment the lender is expecting you to make. That would cause you to default on your mortgage and lose your home to foreclosure. All because you made payments sooner than necessary.

So, I encourage you to stop this practice.