Prepaying Your Mortgage

Prepaying your mortgage, which is simply paying all or part of your mortgage debt before it becomes due, can be a tempting proposition. However, by paying your mortgage early, you can reduce the interest you owe the lender. This can help you save thousands over the long term. These are some things to consider before you prepay your mortgage.

How Do Most People Prepay Their Mortgage?

There are many ways to prepay your mortgages. One popular method is to pay a little more each month on your loan. This could save you thousands, or even tens, of thousands, over the loan's life.

Let's suppose you owe $100,000 on a 30-year loan with a 4.9% interest rate. You would pay $71,000 to the bank if you paid the loan on time. However, you could save $17,000 if you only added $75 to your monthly payment and repay the loan faster.

Bi-weekly mortgage payments are also common. This means that you can make 13 months of mortgage payments per year instead of the 12 required. Again, do the math before you make a decision about which method you will use. To calculate your monthly mortgage payments, use our mortgage calculator.

Is There A Limit On How Much You Can Prepay Your Mortgage?

Some mortgages allow prepayment without restriction, but others have more restrictive terms. For example, some lenders require that borrowers pay a penalty for prepaying their mortgage. This penalty can be based on the length of your mortgage. For example, if you prepay after one calendar year, you may have to pay a fee of 4 percent. After two years, you will pay a penalty equal to 3 percent. Sometimes, there is a fixed amount.

Lenders often demand a prepayment penalty if the mortgage is not paid in full within a specified time frame. This is usually five years. This is to discourage borrowers from refinancing quickly, which could severely reduce the lender's profits. These penalties have other variables. Some lenders won't consider a home sale a prepayment, while others will allow you to pay a maximum amount before the penalty kicks into effect.

Prepayment penalties can have different terms, so make sure you read your mortgage documentation carefully. You will typically see terms like "prepayment penalty disclosure" and "prepayment disclosure," after which the details of the prepayment penalty are listed.

Do You Refinance, Prepay, Or Both?

This question doesn't have a correct or wrong answer. You need to first think about your goals. Refinancing can lower your interest rate or reduce the term of your loan. Prepaying your mortgage will allow you to lower your total debt to the lender and make your monthly payments less. Refinancing is maybe your best option if your goal is to reduce your monthly payments. On the other hand, prepayment is a better choice if your goal is to repay your mortgage as soon as possible.

It might be more beneficial to consider prepayment and refinance separately. If it is financially feasible to refinance, then go ahead. Next, make prepayments on your new lower-interest loan. Just be sure that there are no prepayment restrictions.

When considering prepayment, remember to take into account all of your debts. For example, you're likely to do better if you have high-interest debt like credit card debt than you are if you pay off your lower-interest loans.