User's Guide to Prepaying Your Mortgage

Paying off your home loan early can be a good idea. Your hard work and financial discipline has placed you in a good financial position.

If you want to pay off your home faster it is possible by making adjustments in the manner and amount of house payments you make each month.

You can speed up paying off your mortgage by going to a company that arranges this process for a fee or you can save your money and set up your own accelerated payment schedule.

Setting up this process yourself will require some effort and account monitoring on your part.

Reasons to Prepay a Mortgage Loan

Own Home Free and Clear

It may have made more sense to own your house outright 20-30 years ago because homes were inexpensive.

To some people this is still true. Many people are thrilled by prepaying mortgage debt so they can own their home free and clear 5 to 15 years sooner.

The Lender Gets Less Interest

If you have a 30 year loan that is $200,000 and you are paying a 7%, you could save around $115,000 in interest fee's.

When you consider that the amount of a loan nearly doubles depending on your rate, shaving down even half of such an increase is an attractive option. Many prepayment advocates could find other ways to use $115,000 instead of giving it to lenders.

Relief of Large Debt

If you are the kind of person who shivers at the sight of large bills, mortgage prepayment may be a good choice for you.

As the amount you owe decreases you should feel better.

Reasons to Avoid Loan Prepayment

Tax Advantages Disappear

If you have no house payment your tax advantages may disappear.

In return, this may increase your pre and post tax liability.

Possible Prepayment Penalties

Some mortgage loans have penalties for early payoff. Prepayment penalties are a serious consideration.

Lenders may charge anywhere from $3,000-$10,000 or more depending on the balance of the loan.

Miss Liquid Investments

If you pay extra payments on your house these funds become illiquid.

In order to access these funds you would need to refinance or sell your house.

Some investors avoid prepayment precisely for this reason.

They prefer to invest their excess money in other investments. One of their chief aims is to benefit from liquid investments.

Mortgage Loan Prepayment Procedure

1) Evaluate any prepayment penalties associated with your mortgage.

Ask the lender how much you can pay without being penalized.

2) Decide how you will pay the extra funds on your mortgage

Options include:

a. Adding $150.00 to your monthly mortgage bill

b. Adding $75.00 extra to your mortgage payment, and paying 1/2 of your usual monthly payment every other week

c. Paying a lump sum of interest every January.

This should make it possible to apply the remaining months payments to your principal balance to pay it down.

Any one of these methods should shorten the life of your mortgage by 5 to 15 years.

3) Set up notification with your bank regarding your accelerated payment plan. In writing, you will need to inform your bank of the amount and frequency of your additional payments.

Keep a written log of each payment transaction. This log should include mortgage invoices, notes on cleared checks, and decreases in your principal balances and interest fee's.

4) Monitor your mortgage statements. You need to watch to make sure that your payments are being applied to your principal balance.

This will be evident by a regular reduction in your remaining loan balance.

Refinancing as an Alternative to Mortgage Prepayment

There are a number of good reasons to refinance a mortgage. One of the top reasons to do so is if the new loan you get has a lower rate than your current loan.

Other considerations include: How long you plan to stay in the home, and how soon you can recoup the expenses you incur as a result of refinancing.

Staying in the home will enable you to get back the money you spent getting a new loan. If you stay in the home three or more years it could make sense to refinance and pay for discount points.

Discounts points are what you pay to help get a lower interest rate.

If you refinance your expenses will include closing costs such as appraisal fee's, loan origination and other fee's.

A refinance example could resemble this:

Old Payment $ 2000

New Payment $ 1500

Pretax Savings $ 5000

Refinance Costs $3700.

Pretax savings is decreased by your tax rate. $ 500 X 34%= $ 330.

You divide the $3700 you paid to refinance by your pretax savings to determine how soon you will recoup your refinance expenses.

Refinance Costs $3700

Savings = $330 = 11 Months

Before taking action on this Prepayment User's Guide consult your legal or financial advisor.

If you do not have one or are not in a position to pay for consultation try visiting your local credit counseling agency.

A friend or relative who is reliable may be able to offer you some tips as well.

Those close to you can be instrumental in helping you to take a deeper look at your situation.