You can save thousands of dollars, quickly build
equity and shorten the life of your mortgage by prepaying.
How much can you save?
If you have a 30-year fixed-interest mortgage with a
principal balance of $165,000 and 6% interest, you have a monthly
principal and interest payment of $989. Over the life of your
mortgage, you will pay $191,133 to the lender in interest. If you
add only $25 to your monthly mortgage payment, you will shorten the
life of your mortgage by 23 months and save $14,734 in interest
payments.
If you add $100 to your mortgage, you will save
$46,813 in interest and cut off six-and-a-half years off of the
mortgage.
Is there a catch?
You should check to make sure that your mortgage
contract does not include prepayment penalties. Prepayment will
reduce the amount of mortgage interest you pay, which is tax
deductible. You may need to check your tax situation before you
begin prepaying on your mortgage.
Look to see if your money would have a greater return
invested somewhere else. You may find that it is better to have the
extra money in your budget or in savings.
How to prepay
You can prepay on your own or with the help of your
lender.
If you choose to prepay on your own, all you do is add
an extra amount of money to your monthly mortgage payment. One
popular method is to make one extra principal and interest payment
each year. You simply make a double payment when you are able, like
when you receive a bonus. Or you can divide your monthly payment by
12 and add that amount to each month's payment. In one year, your
total payments will add up to 13 payments.
Many lenders offer biweekly payment plans. You will
pay half of your monthly mortgage payment every two weeks. This will
also result in 13 monthly payments for the year. You should make
sure that the fees charged by the lender for the plan do not cancel
out your savings.
Once you have built up sufficient equity in your home,
you can lower your monthly payment by having your lender remove your
private mortgage insurance.
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