When you buy a house you should make a down payment of at least 20%. If you make a smaller down payment you’ll probably have to pay for private mortgage insurance (PMI), which is expensive. Once you have a mortgage, you can make larger-than-required payments. Any excess will decrease the amount you owe and thus decrease the mortgage interest you’ll be paying.
Prepaying a mortgage is virtually the same as investing at your mortgage rate, aftertax. Suppose, for example, you have an 8% mortgage and your effective marginal tax rate is 40%. Prepaying a mortgage would be the equivalent of investing at 60% of 8%, or 4.8%.
Insight: You can substitute prepaying a mortgage for part of your fixed-income investment strategy. That is, some of the money that would have gone into Treasury or municipal bonds can go into mortgage prepayments, instead. Tip: Try to get your mortgage paid off by the time you retire so you won’t have to keep making those monthly payments.
