Prepaying Your Mortgage for Fun and Profit
"To prepay your mortgage simply means to send the lender (actually, the servicer) more money than is required. Prepaying can save you a lot of interest, reduce the term of your loan (from 30 to 22, for example), and build equity much more quickly. Having more equity makes it possible to tap your home's equity sooner, should you need it; or it can put you in a better position to refinance if you want to. Those are worthwhile goals, but that doesn't necessarily mean that prepaying is the right thing to do in all cases.
"Critics point out that in times of low interest rates, it's possible to get a better return on your money by investing it shrewdly. They also point out that, as the years pass, you'll be paying off your loan with inflated dollars. Nonetheless, millions of people prepay their loans, and they can't all be wrong."
-- From "How to Shop For Your Mortgage"
Some suggested reading about prepaying your mortgage:
- I Can Save You $41,911. Interested?
- Mortgage Myths Could be Costing You $25,000
- "Prepaying Your Mortgage," the latest booklet in HSH's "A Homeowner's Guide To" series
And you'll need a calculator to help you with the 'what-if' problems. Download the Home Buyer's Calculator from Wheatworks Software. It's a free Windows calculator which will allow you to enter a single prepayment, or a range of prepayments, to see the long-term effects of prepaying your mortgage.
What's the difference between getting a bi-weekly mortgage and simply prepaying a standard one? Not much; the overall effect on your loan will be about the same. For more on bi-weekly loans, click here.
We've been asked "I want to use the Home Buyer's Calculator to see how my loan is affected by not prepaying every month. For example, I want to prepay during the first year, skip a year, and prepay during the third year. How can I do this?"
- Enter the start date, rate, & term of the mortgage from "day one."
- Enter the range of *consecutive* prepayments. (For example, you prepaid on payments 13 through 20, then skipped some. You would enter the prepayments through the 20th payment.) Get the amortization schedule, and jot down the remaining balance and the remaining term.
- Start over, and enter the remaining term and balance (and the rate, of course) as a "new" loan.
- Go to step 2. Repeat as necessary.
(For future reference, this is also how you would calculate an adjustable rate mortgage.)