How to Prepay Your Mortgage

Over the course of a 30-year mortgage, you may end up paying more than twice the amount of your principal. The rest goes towards paying interest. That interest is money in the bank’s pocket, not in your bank account. Prepaying your mortgage is paying extra principal, especially during the early years of your loan, meaning that your house will be paid off that much sooner, and you will pay less total interest over the life of the loan. It could put you that much closer to retirement.

In the short term think of prepaying your loan as investing, but investing in a large, illiquid asset. That is, you must sell the house to get the money out again. If you have a low interest rate and you are making good returns on investments, it may not be worthwhile. If other debts are costing you more or if you have little or no savings, focus on those priorities first. The long term prepayment is by far the best thing to do. When the mortgage is paid off 100% of the money you would have paid can now go for investments.

Find out the interest rate on your mortgage and the remaining balance. If it isn’t on your statement, call your bank or whoever is carrying your mortgage to find out.

Use a mortgage calculator (there are many available online or make your own) to find out how much you are paying in interest over the life of the loan.

• Look for a calculator that gives you an amortization schedule, preferably with a graph of interest and principal paid over time.
• Look for a calculator that will let you run scenarios and see what happens if you prepay at various rates.

Decide how much you will prepay. There is no one right answer to this question. Here are some possibilities:

• Prepay a certain percentage of your income. One or even half a percent might be small enough to be painless and still make a big dent.
• Prepay a certain amount each month. Choose a nice, round number that seems right to you.
• Pay a monthly amount that you were paying before on a different loan. If you just paid off a car loan or credit card, put that amount towards prepaying your mortgage instead.
• Continue to pay the monthly amount that your mortgage cost before refinancing, even though the new monthly payment is less.
• Pay the amount of a raise you have just received. The advantage of choices like these is that they keep the rest of your finances the same as they were before. You will not notice that new, “extra” money is going elsewhere.
• Make one extra payment per year. Divide your monthly payment by 12 and pay that much extra each month. Don’t wait until the end of the year or rely on your memory.