How to Prepay a Mortgage
There are a few different methods to prepay a mortgage. Each one works to reduce the overall interest expense to the borrower, although some are easier for certain borrower's budgets than others. Regardless, with a 30-year fixed mortgage, every extra full monthly payment made each year reduces the term of the loan by seven years. You'll not only pay off the mortgage quicker, but also save tens of thousands of dollars in mortgage interest over the life of the loan.
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Instructions
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Consider bi-weekly payments on your mortgage. Instead of paying one full monthly payment, pay half a monthly payment every other week. This works well for those paid every two weeks. At the end of a year, you will have made 26 bi-weekly payments, which is the equivalent of 13 monthly payments in one year. Contact your mortgage servicer--the company that collects your monthly payments--about how to arrange bi-weekly payments. Be aware, however, that some servicers charge a fee for bi-weekly payments--as much as $4 per payment.
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Divide a monthly payment by 12. Add the one-twelfth payment to each mortgage payment; by the end of the year, you will have paid the equivalent of one extra monthly payment. This is a great alternative to Step 1 to avoid any bi-weekly payment fees.
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Use an online mortgage calculator, like the one at MortgageCalculator.org to calculate the monthly payment if you had a 15-year mortgage. Pay your 30-year mortgage payment as if it were a 15-year mortgage payment each month. This will cut the term of your mortgage in half, without having to pay for refinancing.
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Tips & Warnings
Always apply any extra mortgage payments made to principal reduction. Do not allow any to be paid towards future payments. Principal reduction is the only method to reduce your overall interest expense and the term of the loan.
To make sure the extra money goes toward your principal, alert your mortgage servicer. Some will accept a single check with the higher amount, while others prefer receiving two checks--the regular monthly payment, and the extra payment.
Make sure your mortgage does not include a prepayment penalty before you begin making principal reduction payments. Call your mortgage servicer to confirm this. If you do have a prepayment penalty, save the extra payments in a savings account and once the prepayment penalty period ends, make a large lump sum principal-reduction payment.
