How to pre-pay your mortgage and save

There are a few things new home owners can do to save a lot of money on their mortgage. This is especially true at the beginning of the loan's life. We're going to show you how to:

  • Increase your equity faster

  • Lower your loan balance

  • Save tens of thousands over the life your mortgage

Let's look at how you can save money by pre-paying your mortgage first, and afterwards we'll talk about how you can reduce your PMI expenses.


Pre-paying your mortgage
Mortgage pre-payment can save youthousands of dollars over the life of your loan and it's a great way to build home equity quickly, too.

Technically, a prepayment is any extra contribution toward lowering the balance of your mortgage made ahead of time. (So selling your house and paying off the mortgage counts as a pre-payment).

What we're concerned with here, though, is setting up a method of steadily lowering your balance over the life of your mortgage.

The most popular method of pre-paying is to set up a bi-weekly payment plan. Every two weeks you pay ½ of one monthly payment. This way, over the course of a year you'll pay 26 bi-weekly payments instead of 12 monthly payments. You'll pay roughly ½ of a monthly mortgage payment extra per year. That doesn't sound like much, but the extra money goes directly toward paying off the balance (instead of toward interest) and, if you keep it up for the life of a 30-year mortgage, you will shave years and thousands in interest off your loan.

Some lenders or servicers charge fees for setting up and servicing bi-weekly payment plans. Because of this, many home owners like to set up their own pre-payment system. You can either send in a little extra every month or one large extra payment per year. This method allows for more flexibility, but you'ree responsible for keeping track of everything.

Sidebar
Both of our recommended lenders offer bi-weekly mortgage programs with no fees involved. Whether you've closed on your loan or are still applying, be sure to ask for this feature. It really will save you thousands of dollars.

A formal bi-weekly plan can be especially convenient and easy for home owners who get paid on a similar two week schedule. The less structured do-it-yourself pre-payment plan is a good idea for those whose income fluctuates, like commission earners or the self-employed. If you've had a good month, put the extra cash towards the mortgage.

Whatever the case, notify your loan servicer before embarking on any kind of prepayment plan. There may be specific procedures you have to follow, like sending in a separate check for the additional amount. Make sure the servicer knows to put the extra money toward only the loan balance not toward interest. This distinction is what's saving you money.


Things to be aware of.
Pre-paying on your mortgage is almost always a great money saver. However, under some circumstances it may not be.

If you have a lot of credit card debt use your extra cash to pay it off before you put any towards reducing your mortgage. The interest you pay on credit card debt is a lot more than the interest you accrue on an equal amount of mortgage debt.

You might also lose money if you agreed to any pre-payment penalties on your mortgage. We recommend never agreeing to such penalties, and every standard mortgage offered by our recommended lenders is penalty-free.

If you do have such a penalty on your loan, find out what it is. If it's a small, one-time charge, pre-paying may still save you a lot of money, even with the penalty.

Finally, mortgage interest is tax deductible and if losing part of that deduction puts you in a different income bracket, pre-paying may not be worth it. This isn't really a factor for most home owners, and even if it is, the cost probably doesn't outweigh the long-term savings of pre-paying. However, if you think it might make a difference for you, you should find more information about tax deductible interest.



Next: Save on your mortgage by cutting PMI

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