When you prepay your mortgage, it means that you make extra payments. Prepaying can save you thousands of dollars, let you pay off the loan years early and build equity faster.
There are several ways to prepay:
Here’s an example of how prepaying saves money and time: Finley takes out a $120,000 mortgage at a 4.5 percent interest rate. The monthly principal and interest total $608.02. Here’s what happens when Finley makes extra payments:
|Payment method||Pay off loan in …||Total interest||Total interest saved|
|Minimum every month||30 years||$98,888|
|13 payments a year*||25 years, 9 months||$82,870||$16,018|
|$100 extra every month||22 years, 6 months||$70,944||$27,944|
|$50 extra every month||25 years, 8 months||$82,452||$16,436|
|$25 extra every month||27 years, 8 months||$89,864||$9,024|
*Extra $608.02 payment
Bankrate’s mortgage amortization schedule calculator can help you figure out the impact of extra payments on your mortgage. Click “Show amortization schedule” to reveal the section that lets you calculate the effect off additional payments.
Paying off a home loan in equal monthly payments over a set period.
There are potential downsides to prepaying. Prepayment reduces mortgage interest, which is tax-deductible, and may not be the most prudent course, depending on your tax situation. You also want to consider whether your return on investment might be higher elsewhere. And of course, any money you prepay becomes much less accessible.
Budget an extra amount each month to prepay your principal. One tactic is to make one extra principal and interest payment per year. You could simply make a double payment during the month of your choosing, or add one-twelfth of a principal and interest payment to each month’s payment. A year later, you will have made 13 payments.
Once you have built sufficient equity in your home (and sometimes even before), you should ask your lender to remove your private mortgage insurance, or PMI.