Is Prepaying Your Mortgage A Good Decision?

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Prepaying your mortgage can be a good way to save on interest and pay off your loan much sooner.

If you have the extra money to put toward your mortgage balance, then “you’re also building equity,” says vice president and director of residential lending with Industrial Bank, Tammie Barrett. And that means you can potentially lower your monthly payments if you can get rid of private mortgage insurance (PMI).

But before you start prepaying your mortgage, you need to talk with your loan servicer first. “Make sure they offer that option. And  sometimes they might have a fee to set it up, so you want to know if there’s a fee” says mortgage-industry veteran and educator Jennifer Beeston.

To get an idea of whether the potential savings from prepaying your mortgage is worth it, let’s talk a look at the numbers.

How Prepaying Your Mortgage Can Save You Money

When you make extra mortgage payments directly to your principal balance, it could save you thousands of dollars on interest. And those extra payments will help you pay off your loan faster.

For example, paying an extra $2,000 toward your mortgage principal every year would save you over $29,000 over the course of a 30-year loan if you had a $350,000 mortgage with a 3% interest rate. You would also pay off your mortgage 53 months, or roughly four and a half years, early. 

That’s only an extra $167 a month, so even paying a small amount extra toward your mortgage each month can add up to big savings. The longer your loan term and the higher your interest rate, the more you’ll save by prepaying your mortgage. Here’s what you could save with additional small payments on various types of loans.

Loan TermStarting Loan BalanceInterest RateMonthly PaymentExtra Monthly PaymentExtra Paid AnnuallyTotal Interest SavingsMortgage Paid Off
30 Years$300,0003%$1,264$50$600$10,42021 Months Early
15 Years$300,0002.5%$2,000$50$600$1,8615 Months Early
30 Years$300,0003%$1,264$100$1,200$19,48340 Months Early
15 Years$300,0002.5%$2,000$100$1,200$3,60710 Months Early

You can calculate how much you’d save by making extra mortgage payments using NextAdvisor’s mortgage calculator. Just enter your loan information, click on “amortization schedule,” and you can add extra monthly payments, annual payments, or one-time payments.

The more you pay early, the better results. You could even pay off a 30-year home loan as if it were a 15-year loan. “If someone can afford to make a 15-year payment, but their loan is on a 30-year term, then by all means, I would say do that,” Barrett says.

You’ll usually pay much less interest on a 15-year mortgage than a 30-year mortgage. But 15-year loans typically have much higher monthly payments, which makes them more difficult to qualify for. So you could end up in a scenario where you can afford the higher payments with a 15-year mortgage, but are only able to qualify for a longer-term loan. 

In this situation, you could follow Barrett’s advice and make payments on the 30-year loan as if it were a 15-year loan. Your mortgage would most likely have a higher interest rate than a comparable 15-year loan, but you could still save a massive amount of interest.

Loan TermStarting Loan BalanceInterest RateMonthly PaymentExtra Monthly PaymentExtra Paid Each YearTotal Loan Cost
30 Years $350,0003%$1,475$0$0$531,357
30 Years $350,0003%$1,475$858$10,296$439,234
15 Years $350,0002.5%$2,333$0$0$420,106

Talk to Your Lender Before Prepaying Your Mortgage 

You should talk to your loan servicer before you make any extra payments. “The loan servicer needs to know that the borrower is making an additional payment and they wish to have that payment directly applied to the principal balance,” Barrett says.

Setting up everything correctly with your loan servicer will help you avoid headaches down the road, Beeston says. Forbearance is a real issue in the industry right now, Beeston says, and off-schedule payments could cause a red flag. “What I’m seeing on my end is people who are getting notifications on their statements and their credit reports are being triggered as if they’re in forbearance, when they’re not,” she says. This can happen if your loan servicer unexpectedly receives a partial payment.

You also want to be sure that extra payments are being fully applied to your principal balance. Some loan servicers may apply over payments to your interest if you don’t coordinate with it in advance. Also, be sure to confirm that there are no prepayment penalties for your mortgage.