If you want to pay off a mortgage early, should you do it gradually or all at once? An expert answers

Ilyce R. Glink
·Yahoo! Homes Contributor

Welcome to the launch of Yahoo Homes' Ask an Expert feature. Our money maven Ilyce Glink will be answering readers' home-related finance questions on subjects like mortgages, refis, and home equity or home improvement loans. Click here to submit a question. She might answer in a future post here on Yahoo Homes!

Our first question comes from Tami, a 56-year-old single woman who wants to be mortgage-free by the time she's 66:

Q: I am wondering what your opinion is about paying additional money toward my mortgage principal to pay off the balance early. Is it better to put extra money into paying off the mortgage, or should I invest that same money in another investment or 401(k)? I'd like to be able to either pay off the mortgage in 10 years at age 66 or have the funds available from other investments or my 401(k) to pay off at that time. -- Tami

I'm often asked whether it’s better to prepay a mortgage or invest the difference. But you’ve put a fresh twist on it: You already know you want to pay off your mortgage early and are just looking for the best way to do that. With that goal in mind, you need to consider your own level of financial literacy and comfort with investing.

THE RISK-FREE ROUTE

Putting money into your home is a simple and safe investment. You will effectively “earn” your net interest rate. So, if your mortgage interest rate is 4.5 percent, and you don’t itemize your deductions, every dollar you prepay earns an effective interest rate of 4.5 percent – a lot better than you’ll do if you keep the cash in a savings account.

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The nice thing is you won’t lose any money on this investment. It’s risk-free. And you’ll be building equity in your home. Paying off your mortgage by the time you retire means you’ll reduce your living expenses just as your income is potentially diminishing.

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WHAT'S YOUR EXPERTISE?

Could you make more money by actively investing that cash? Perhaps, if you know what you’re doing and get a little lucky. But if you know very little about investing or you worry about the risks and would need to bring in a pricey professional to help you navigate this world, then investing may not be right for you.

Your immediate financial goal isn’t to create a diversified investment portfolio that will pay dividends over time. Your goal is to save money, so that in 10 years’ time you can pay off your mortgage. If you need to invest a lot of time and money in order to accomplish this, then it may not be worth it.

FIRST, MAX OUT YOUR 401(K)

If you already have a 401(k) set up and your employer matches any of your 401(k) contributions, you should max out your contributions (especially to take advantage of any matching dollars). Because you’ll be past age 59 when you want to pull out the money, you won’t be subject to any penalties for an early withdrawal, though you will have to pay any federal and state income taxes that are owed. You could also consider putting the money into a Roth IRA, if you’re eligible. Roth IRA contributions are made with after-tax dollars, so withdrawals are tax-free.

PREPAY THE RIGHT WAY

If you do choose to prepay your mortgage, simply attach a second check for the prepayment amount. Write “Use to prepay balance” in the memo section and be sure to check off the box that says “prepayment amount” on the coupon your lender sends you. If you don’t have a payment coupon, be sure to enclose a note with the checks so there is no confusion. When you get your monthly or annual statements, make sure they properly reflect any additional payments you’ve made.

Also make sure that there’s no prepayment penalty on your mortgage. If you've had the loan for some time, that typically won't be the case, but it’s still worth a cursory glance over your paperwork.

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Ilyce Glink is an award-winning, nationally syndicated real estate columnist, blogger and radio talk show host, and managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink.