When you buy a house you should make a down payment of at least 20 percent. 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 percent mortgage and your effective marginal tax rate is 40 percent. Prepaying a mortgage would be the equivalent of investing at 60 percent of 8 percent, or 4.8 percent.
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. Try to get your mortgage paid off by the time you retire so you won’t have to keep making those monthly payments.