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, pre-payment
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 pre-payment penalty,
which can vary by state, lender, or mortgage
plan. Typically, a pre-payment 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
pre-payment penalty.
If you're
fortunate enough to have found a mortgage that
doesn't charge a pre-payment penalty, or if you
decide the money you will save is worth the
fine, contact your mortgage service to see how
they handle pre-payments.
There are
typically two ways:
-
You can
create a pre-payment 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 service 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
pre-payment 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.
Mortgage Glossary1
