Which Mortgage Should I Pay Off First?

Many homeowners have more than one mortgage on their property these days. Second mortgages or home equity loans are popular ways to pay for home improvements, vacations, college tuition, medical bills or just paying off other credit card bills. However, second mortgages are also secured by your home. So if you don’t have a plan on how you are going to pay the mortgage back, you could find yourself in financial trouble and even at risk of losing your home to foreclosure.

Perhaps you find yourself with the pleasant problem of trying to decide what to do with an unexpected windfall of cash. Maybe you received a bonus at work, a sweet early retirement package, an inheritance or trust fund, or you hit the lottery. Whatever the source of your newfound funds, it’s always a smart strategy to use extra money to pay off debts and free yourself up from lingering monthly payments. If you have mortgages, it may be wise to pay them off, or at least pay down some of the principal.

Analyzing the loan terms

Prepayment Penalties

Before you decide which mortgage to pay off first, check both and make sure you don’t have any pre-payment penalties. Usually pre-payment penalties only apply to the first few years of a loan or when you refinance. If either of your loans has a prepayment penalty, then you should pay the one that does not have a penalty off first.

ARM’s or Variable Rate Mortgages

If neither of your loans has a prepayment penalty, then pay off the adjustable rate mortgage first. Adjustable rate Mortgages reset to higher rates. Sometimes the rates are so high that borrowers cannot afford to make their new mortgage payments when the rates reset. This is what happened to many sub-prime borrowers that caused a huge increase of foreclosures on the market the last couple years.

Higher Interest Rate Mortgages

If you have two fixed rate mortgages, then you should pay the one with the higher interest rate off first