Is Prepaying Your Mortgage A Good Decision? Bankrate
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Image by Getty Images/Illustration by Bankrate Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Written by Mortgage reporter Zach Wichter is a former mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered Nov. 11, 2021 Edited by Mortgage editor Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Nov. 11, 2021 Share
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Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in . Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way. When you prepay your mortgage, you make extra payments on your principal loan balance. Paying additional principal on your mortgage can save you thousands of dollars in interest and help you build equity faster. There are : Make an extra mortgage payment every year Add extra dollars to every payment Apply a lump sum after an inheritance or other windfall Recast your mortgage Some combination of the above How much can I save by prepaying my mortgage
The benefit of paying additional principal on a mortgage isn't just in reducing the monthly interest expense a tiny bit at a time. It comes from paying down your outstanding loan balance with additional mortgage principal payments, which slashes the total interest you'll owe over the life of the loan. Here's an example of how prepaying saves money and time: Kaylyn takes out a $120,000 mortgage at a 4.5 percent interest rate. The monthly mortgage principal and interest total $608.02. Here's what happens when Kaylyn makes extra mortgage payments. Payment method Pay off loan in … Total interest Total interest saved *Extra $608.02 payment Minimum every month 30 years $98,888 $0 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 Bankrate's can help you determine the impact of extra payments on your mortgage. Click "Show amortization schedule" to reveal the section that allows you to calculate the effect of additional payments. Use Bankrate's to see how much interest you can save by increasing your mortgage payments. How to make extra payments on my mortgage
There are two for making extra payments on your mortgage: Biweekly mortgage payments Extra monthly payments With biweekly mortgage payments, you make a payment toward your mortgage every two weeks. If you pay half of your minimum payment with each payment, you'll always make your minimum monthly payment. However, there are 52 weeks in a year and just 12 months. Over the course of a year, you'll make 26 biweekly payments which would total the amount of 13 monthly payments. In effect, you make an extra monthly payment each year. The extra money goes toward reducing principal, helping you pay the loan off more quickly. You can also choose to make pay more toward your loan balance each month. For example, if your loan's minimum payment is $2,000, you can set up a monthly payment of $2,200. Each month, the extra $200 will pay down the principal of your loan and help you pay it off more quickly. DIY extra payment to prepay mortgage
Let's say you want to budget an extra amount each month to prepay your principal. One tactic is to make one extra mortgage 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. Make sure you earmark any additional principal payments to go specifically toward your mortgage principal. Lenders typically have this option online or have a process for earmarking checks for principal payments only. Ask your lender for instructions. If you don't specify that the extra payments should go toward the mortgage principal, the extra money will go toward your next monthly mortgage payment, which won't help you achieve your goal of prepaying your mortgage. Once you have built sufficient equity in your home (at least 20 percent), ask your lender to . Paying down your mortgage principal at a faster rate helps eliminate PMI payments more quickly, which also saves you money in the long run. You can also refinance your mortgage to eliminate PMI altogether. Video Pros and cons of prepaying mortgage
What to consider before prepaying your mortgage
Prepaying your mortgage is a great goal to work toward, but before you do, make sure you've met these financial milestones first: Get the match: If you're not getting the full company match from a , you're passing up an instant return. The typical company match equals 50 to 100 percent of your contribution, up to a limit (often up to 3 to 6 percent of your contributions). That's where extra money should go first until you're on track for retirement. Retirement plan contributions get a tax break and the more time your money has to grow, the better. Pay off your higher-rate debt: It doesn't make sense to pay off a 4 percent mortgage if you have accruing at 16 percent or more. Plan for emergencies: An with at least three to six months' worth of expenses can help you weather most setbacks. Protect yourself: You should be adequately insured, which for most people means having property, health and disability policies. If you have financial dependents, you'll probably want life insurance, as well. Watch out for prepayment penalties: Some lenders will charge a if you repay your mortgage before its due date. If your loan has that clause, make sure you're saving more than you'll get charged for repaying the loan early. Don't give up a low interest rate: Interest rates are currently at historic lows. In many cases, homeowners can earn more by investing their money than by making additional mortgage payments. For people with very low interest rates, you can come out ahead if you keep the mortgage for the full term and invest more money. Once those bases are covered, prepaying a mortgage comes down to discipline and comfort level. Do you want to be completely debt-free, or would you prefer your money working harder for you in other ways? Ideally, you want to pay off your mortgage before retirement so you don't have those monthly payments to worry about if your income becomes more limited. Is prepaying my mortgage right for me
Prepaying your mortgage can be a good idea in many situations. It can be a big step toward becoming debt-free and greatly reduce your monthly expenses. However, it's also important to think about the drawbacks. For starters, tying up your cash in your home means you have less liquidity and wiggle room in your budget. In other words, you'll have less readily available cash to put toward things like increasing your 401(k) contributions or paying down high-interest debt, for example. These financial goals could offer a higher return on your investment. Another consideration is the opportunity cost of not having that extra money invested elsewhere. Over the past four decades, the stock market has returned an average of 13 percent a year. When deciding whether to pay off your mortgage, look at your entire financial picture. Here are some important questions to consider: Is your monthly budget tight after meeting necessary expenses? Is your income variable or unpredictable? How long do you plan to stay in your home? Are you ? Do you have an adequate of three to six months of household living expenses? Do you have a lot of high-interest credit cards or loans? Assessing your financial goals, income and budget can help you decide whether it makes more sense to address other pressing financial concerns before paying ahead on your mortgage. Learn more
Can you lower your property tax bill? Written by Zach Wichter Mortgage reporter Zach Wichter is a former mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy. Edited by Mortgage editor You may also like