In our previous blog we looked at some ways you can pay off your home early: How to Pay Off Your Mortgage Early.

You could increase the size of your mortgage payments, do accelerated mortgage payments, make lump-sum payments, shorten your amortization period when you refinance or pay it off in cash. But there are mistakes that can be a real setback if you haven't considered them.

Today, we're looking at some Mistakes to Avoid When Paying Your Home Off Early.

Are You Allowed to Make Additional Payments?

Before you make any additional payments, you need to know what exactly is permitted. Do this by checking your mortgage document and talking with your lender. If you are a first-time home buyer, make sure to discuss what additional payment privileges they will give you.

Investments Gains vs. Interest Payments

A big mistakes has to do with investments. If you're paying off your mortgage to save on interest, and you're also investing your money, you'll need to calculate and estimate whether you could end up making more money from your investments than you will end up saving in interest by paying off your mortgage early.

If your investments are going to gain you more than interest will cost you, maybe consider forgoing big lump sum payments and instead put more towards your investments. You can still make extra payments

Paying Interest Not Principal

If you're able to make extra payments each month, make sure the lender does not use it to pay down the interest for the next payment. If it doesn't go towards reducing your principal balance then it does virtually nothing to help pay off the home faster. Talk with the lender and be certain the payment is going to the principal.

Penalties for Prepayment

When you pay off your mortgage earlier than the agreed-upon date, some lenders will try to compensate for their own lost profits by charging a prepayment penalty. Prepayment penalties can amount to a percentage of the loan or a few months' worth of interest. Some lenders may hit customers who try to pay off their loans early pretty hard.

Say you have a $300,000 mortgage with 4% prepayment penalty; that would set you back $12,000.

No Funds Left Over

Some people get so intense about paying off their mortgage, they leave little saved for other things. In our post on How to Build Wealth Automatically, we mentioned how the earlier you begin saving the better. Automating regular contributions to TFSAs, RRSPs, savings, and investments, are best used in conjunction with homeownership and accelerated payments. 

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If all your focus and extra money is put toward homeownership then you may fail to make use of the magic of compound interest, which can have big effects in the long run.

A balanced approach that includes paying off your mortgage early, saving, and investing is the smartest way to use your money.