Paying ahead

Some borrowers choose to prepay their home mortgage. They do this by paying extra money in addition to their regular monthly payment. In this way, borrowers can reduce the amount of interest they pay. At the same time, the loan is paid back more quickly, which helps to build equity faster.

If you decide to prepay, there are three ways to do it. First, you can simply add a certain amount to your monthly payment. This method can be difficult because it requires discipline and financial responsibility. The upside is that if your financial situation changes, and you no longer want to prepay, you are under no obligation to do so. In other words, you can stop prepayment at any time with no penalty.

The second way involves setting up biweekly payments instead of monthly payments. Borrowers on the biweekly plan pay a total of one extra payment each year (13 instead of 12). This prepayment option has less flexibility; if money becomes tight, you cannot simply switch back to monthly payments.

Finally, you can simply prepay whenever you happen to have extra money. For instance, many people who receive monetary gifts (for example, an inheritance) will put the extra cash toward their mortgage.

When you apply for a home mortgage, find out your lender’s policy regarding prepayment. Make sure that prepayment is allowed and that it doesn’t carry a large fee or penalty. Since prepayment means that the lender makes less money on the loan, some companies discourage it. The good news is that there are plenty of companies that allow it. Seek them out. It’s worth it.