November 21, 2012
Pre-Payments are any payment made on your mortgage loan that is not required by the terms of your loan. The payment outlined on the schedule you are given, or on the commitment you have signed, is the required interest payment. Looking at the payment schedule shows how much of the payment is going towards interest and how much is paying down the principal. When you make a pre-payment, it goes directly towards the principal. This is a great idea because it lowers the amount the regular interest payment is calculated on, which reduces the time it will take to pay off the loan.
Lenders usually offer 2 percentages for prepayment, i.e. 20% /20% . The first percentage refers to how much you can increase your regular payment without incurring a penalty. It is based on you regular payment amount. If your scheduled payment is $600, then you would be able to increase the payment by $120, or 20% of $600.
The second percentage is the annual prepayment allowance, or how much your yearly lump sum payment can be for. It is calculated on the original mortgage amount. In this case, for an initial mortgage of $100,000 you would be able to make a lump sum payment of up to $20,000 each year.
Obviously, making a lump sum payment is the best way to reduce the amount of principal you owe thereby shortening the time it will take to pay down the loan. Increasing the payment by the allowed percentage is the next best option. Some Lenders also allow a Doubling up of payments once a year.
Do you regularly make pre-payments on your mortgage? Why or why not? We would love to hear from you so don’t be shy and leave a comment below.