Pre-Pay Your Mortgage

No matter how good the economy is at any one given time, people are always looking for ways to stretch a dollar. One method is to refinance your home, quite a viable option considering today’s low interest rates. But there is another way to accomplish such a feat -- pre-paying your home mortgage.

A mortgage pre-payment plan is actually simple to develop and not necessarily that costly to maintain. You simply send your mortgage company additional money each month and you will save thousands of dollars in interest.

For example, on a 30-year fixed-rate $85,000 mortgage at 7 1/2 percent interest, your monthly principal and interest payment is $594.33. Over the scheduled 30 years, you would pay principal and interest payments totaling $213,959, of which $85,000 is principal and $128,959 is interest.

Understand that mortgage loans are calculated to pay out over a fixed period of time with a fixed payment. If you were to increase the payment amount, you would thereby decrease or shorten the loan period and interest paid.

Take the above example, for instance. If you made the equivalent of one additional mortgage payment each year, you would end up paying $180,280 in total payments, a savings of $33,679. And, not only would you save money, but you’d be building equity and paying off your loan much more quickly -- in slightly over 23 years rather than the scheduled 30 years.

Wouldn’t the extra payment be a little painful, you ask? Not necessarily. Off hand, there are two ways to make it less painful.

If you receive a federal and/or state tax refund, invest some of that money into the mortgage loan. Otherwise, you may consider spreading out that one extra payment over the course of the year.

The normal payment on the aforementioned loan would be $594.33 monthly. Divide that payment by 12 and you arrive at $49.53 that has to be added to each monthly payment in order to pay the equivalent of one extra payment each year. Just $49.53! For some, that’s barely the cost of a nice dinner out. Per day, that calculates to $1.65 -- less than some of us pay for a downtown parking space or for a couple cups of coffee.

Remember that all of the money you send to your mortgage company in addition to your normal payment will reduce your mortgage term and total interest payments. The more you send, the shorter the term and the less you’ll pay.

If you’ve ever contemplated prepaying your mortgage, now is the time to do it! In fact, not doing it right now is literally a poor decision!

Be sure to contact your REALTOR® or mortgage company with any questions.