LESSON 27: PREPAYMENTS
The motivation for prepaying a mortgage is simple -- you can save
thousands of dollars in interest and shorten your loan term considerably!
Many borrowers will want to review their loans, especially after
receiving pay raises and bonuses, to see if prepaying makes sense.
Prepaying a mortgage is an
easy, low-risk way to cut debt and build home equity quickly.
There are two basic ways of prepaying a mortgage:
1) Create a prepayment schedule yourself.
You may want to send in a fixed, extra payment each month, for example,
or one large payment a year. Don't start prepaying without contacting
your mortgage servicer first to find out exactly how the payment
should be handled. Some borrowers can write one check and just fill
in a line on the payment statement that indicates that part of the
check amount is for prepaying principal. Others will have to include
separate checks with memos on them indicating the money is for prepaying
principal. No matter what, make sure you won't trigger any prepayment
penalties you agreed to at closing! See
flexible -- not locked in to a higher monthly payment during
maintain schedule and records.
say you have a 30-year fixed mortgage of $100,000. The interest
rate is 7 percent. The monthly principal and interest payments
would be about $665, and you would pay $139,508 in interest
over the life of the loan. By adding $25 a month, you could
shorten the term by more than three years and save $18,214 in
interest. For an extra $100 a month, you would save $50,506
in interest and shorten the term by nearly 10 years.
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