Ever since you could walk & talk, you've heard the same advice from your parents, "Stay out of debt!" And each of us has taken this "wisdom" to the farthest degree and apply this concept to every dollar owed to all lenders.

Debt, Debt, Go Away!
The problem is that there are actually two kinds of debt: good and bad. Generally, bad debt includes credit cards, new-car loans, and personal loans. On the other hand, good debt covers student loans, used-car loans, and home mortgages.

Good debt, or as we call it here "Sailing Debt", is actually an investment in your education, career, and family. Without the presence of Sailing Debt--and the resources that it provides--you would be severely set back in the pursuit of your needs.

The Prepay Dilemma
You probably think it's always a good idea to pay off debt early if you have the resources to do so. However, this is not always best. Good debt often has repayment terms or interest rates so low, that you can use the "pay off" money in other ways to generate a better return.

Disadvantages of Paying Off Mortgage Early
Negative factors to consider include:

• Prepaying your loans means your funds are not available for other purposes. Although you are building equity, you are reducing your liquidity. If an unexpected investment opportunity were to come up or you suddenly had a financial emergency, you might not have the cash available to deal with the situation. Additionally, an investment opportunity could earn you more than the amount of interest you save by prepaying.

• In some instances, a lender may charge a prepayment penalty. In such cases, you must calculate whether the amount you save via prepaying the loan will exceed the penalty amount. Prepayment penalties can also be "hidden" in the method of interest calculation. A special consideration in mortgage-loan contracts (called the Rule of 78s) allows lenders to charge more interest in the early stages of a loan. This interest is not refunded if you repay the loan early.

• Prepayment does not change your obligation to make regular monthly payments. If you send in double payments for three months, you are still required to make a regular payment the next month. Be careful not to prepay so much that you can't afford your regular monthly payment.
• If you prepay your home mortgage, you can lose a valuable tax deduction.

But Also a Major Advantage
Real estate loans are amortized, and, as a result, much more of your monthly payment is applied toward interest on the loan at the beginning of the loan's term, while the bulk of the principal on the loan is paid toward the end. Paying off the loan early (either using a lump-sum payment or paying a little extra every month) will quickly decrease the principal balance owed on the loan, build up "equity" more quickly, and shorten the term of the loan. The result is that you'll save a great deal on the amount of interest you ultimately pay on the loan...this interest saved could equal tens of thousands of dollars!

How Do I Decide What to Do?
At the end of the day, the decision ultimately depends upon your own temperament, risk tolerance, and debt-comfort-level. If you're losing sleep at night because you owe money to a lender, then you may be better off paying down your mortgage early. On the other hand, if you don't mind maintaining a mortgage for years down the road, then you may want to consider alternative options with the extra cash in the bank to make some other moves.

A qualified financial planner can assist you in simulating the various outcomes and scenarios that are available for your unique situation.