Prepayment:
By paying off your mortgage early, you can end up saving thousands of dollars off interest over the life of your loan.
For example, if you have a 30 year fixed mortgage of $100,000 at 7 percent interest, your monthly payment will be about $665. Over the life of your loan, interest will amount to $139,508. By paying even $25 more a month, you can reduce this to $121,294 - a savings of $18,214! If you pay $100 extra each month, you will end up saving $50,506 in interest and shorten your loan by almost 10 years. Therefore, if you can afford it, and if the terms of your mortgage allow it, prepayment of your mortgage is generally a good idea.
By paying off your mortgage early, you can end up saving thousands of dollars off interest over the life of your loan.
For example, if you have a 30 year fixed mortgage of $100,000 at 7 percent interest, your monthly payment will be about $665. Over the life of your loan, interest will amount to $139,508. By paying even $25 more a month, you can reduce this to $121,294 - a savings of $18,214! If you pay $100 extra each month, you will end up saving $50,506 in interest and shorten your loan by almost 10 years. Therefore, if you can afford it, and if the terms of your mortgage allow it, prepayment of your mortgage is generally a good idea.
Some lenders, however, punish borrowers if they pay all or part of their mortgage principal early. They impose a charge called a prepayment penalty which can vary by state, lender, or mortgage plan. Typically, a prepayment penalty will amount to several percentage points on your unpaid loan balance. For a $100,000 loan, even a 3 percent penalty will amount to a hefty $3,000. Therefore, check with your lender beforehand to see if your particular mortgage includes a prepayment penalty.
If you're fortunate enough to have found a mortgage that doesn't charge a prepayment penalty, or if you decide the money you will save is worth the fine, contact your mortgage servicer to see how they handle prepayments.
If you're fortunate enough to have found a mortgage that doesn't charge a prepayment penalty, or if you decide the money you will save is worth the fine, contact your mortgage servicer to see how they handle prepayments.
There are typically two ways:
- You can create a prepayment schedule yourself. In addition to your monthly mortgage payment, you mail a separate check to your lender and specify that it is to be used towards lowering your principle.
- The mortgage servicer can set up a formal payment plan, often called a biweekly mortgage, in which your payments are made every other week, instead of monthly. In this case, the monthly payment is divided in two and that amount is paid every other week. You are basically making 26 half-payments a year, the equivalent of 13 monthly payments, with the 13th monthly payment going entirely towards paying off your principle balance. If done correctly, this can dramatically shorten the life of your mortgage, taking years off the length of your loan and saving you thousands of dollars in interest.
Although prepayment of your mortgage is generally a good idea, remember that the money you saved by reducing your mortgage interest is no longer tax deductible, which may not always be beneficial to your tax bracket. Also, putting that extra money into an investment account can sometimes be more profitable, so consider carefully.
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