Extra payments

Making extra mortgage payments is a great way to reduce the overall cost of your loan. This page will help you educate yourself on how prepayment works.

Of course, more important than knowing how it works is making sure that it is allowed. When you apply for a mortgage, you absolutely must make sure that prepayment is allowed. Even if you never in a million years believe that you will have extra money to put towards the prepayment, you need to reserve the option.

Most reputable lenders allow prepayment, but you have to ask. In theory, prepayment isn’t exactly ideal for lenders because they lose some of the earnings they would have made through interest. In practice, most lenders don’t mind because it allows them to recoup their investment sooner. In any case, make sure that you can do it, because prepayment polices vary widely among lenders. You should choose a lender that doesn’t charge prepayment fines.

Now that you know you must reserve the option to prepay, you can take the time to understand how prepayment works. Essentially, every time that you make a mortgage payment that is above the minimum amount due, you are prepaying. This includes additional payments, made separately from the regular fees.

The extra money goes toward reducing the principal, which means that you will pay less interest and finish repaying the loan early. As an added bonus, you will build home equity sooner, which will give you access to special homeowners’ loans and other exciting opportunities.

So, anytime you find that your budget permits, add a little to your regular mortgage payment. While the benefits won’t be immediately obvious, the decision will serve you well in the long term.