The Benefits of Prepaying Your Mortgage
Regardless of the state of the economy, homeowners are always looking for ways to save money and pay off their homes faster. While refinancing is a common option when interest rates are low, there’s another powerful strategy that can help you reduce interest costs and shorten your loan term—prepaying your mortgage.
By making extra payments toward your mortgage, you can cut years off your loan and save thousands in interest. The good news is that it’s easier to do than many people think, and it doesn’t have to be a financial burden.
How Mortgage Prepayments Work
A mortgage loan is structured to be paid off over a fixed period, usually 15 or 30 years, with a set monthly payment. The majority of the early payments go toward interest, while only a small portion is applied to the principal. By making additional payments toward the principal, you reduce the amount of interest you pay over time and shorten the loan duration.
For example, let’s look at a 30-year, fixed-rate mortgage:
- Loan amount: $85,000
- Interest rate: 7.5%
- Monthly principal and interest payment: $594.33
- Total payments over 30 years: $213,959
- Interest paid over the life of the loan: $128,959
By making extra payments, you can cut years off your mortgage and save thousands in interest.
How Much Can You Save?
One simple strategy is to make one extra payment per year. Let’s see how this affects your mortgage:
- If you make one additional full mortgage payment per year, you would:
- Pay a total of $180,280 instead of $213,959
- Save $33,679 in interest
- Pay off your mortgage in about 23 years instead of 30
That’s a significant savings just by making one extra payment per year!
How to Make Extra Payments Without Breaking the Bank
The idea of paying an additional mortgage payment each year may seem daunting, but there are simple ways to make it more manageable:
- Split Your Extra Payment Across the Year
Instead of making one large extra payment at once, break it down into smaller monthly contributions.
- Take your monthly mortgage payment ($594.33) and divide it by 12
- This equals $49.53 per month
- Add this amount to your regular monthly mortgage payment
By doing this, you’ll effectively make one extra mortgage payment per year without feeling a financial strain.
- Use Tax Refunds or Work Bonuses
If you receive a tax refund, bonus, or financial windfall, consider putting some or all of it toward your mortgage. Even one lump-sum extra payment per year can shave years off your loan.
- Make Biweekly Payments
Another strategy is to switch to biweekly mortgage payments instead of monthly payments.
- Instead of paying 12 monthly payments per year, you make half-payments every two weeks
- Since there are 52 weeks in a year, this results in 26 half-payments, or 13 full payments per year
- This effectively adds one extra payment per year without requiring a large lump sum
This strategy can cut years off your loan and save thousands in interest while keeping payments more manageable.
When Is Prepaying Your Mortgage a Good Idea?
While making extra payments can lead to big savings, it’s important to consider your financial situation and goals before committing to a prepayment plan.
Prepaying your mortgage is a good idea if:
- You plan to stay in your home long-term and want to own it outright sooner.
- You have extra cash available and have already built an emergency fund.
- You want to reduce total interest costs over time.
- You have a fixed interest rate loan—prepayments can have a bigger impact.
However, prepaying may not be the best option if:
- You have high-interest debt (such as credit cards) that should be paid off first.
- You need extra cash for savings, investments, or emergencies.
- Your mortgage already has a very low interest rate, making other investments more attractive.
- Your lender charges prepayment penalties—check your loan terms before making extra payments.
Final Thoughts: Should You Start Prepaying Your Mortgage?
If paying off your mortgage early aligns with your financial goals, starting a prepayment plan can help you build equity faster and save thousands in interest. Whether you make one extra payment per year, pay biweekly, or round up your monthly payments, every little bit counts.
Before committing to prepayment, check with your REALTOR, mortgage lender, or financial advisor to ensure it’s the right move for your situation. By taking control of your mortgage now, you can enjoy a debt-free home much sooner than expected.
