Prepaying your mortgage

How to pay your mortgage off early

On our page about mortgage interest, we saw that a 15-year loan saves you a bundle of interest vs. a 30-year loan. But maybe you're stuck with a 30-year loan because that's all the bank will give you, or because you already bought a house with a 30-year loan. In that case, you can still save on interest by making prepayments on your mortgage. That means paying a little extra each month so that you pay off the whole loan faster. Actually, you don't have to pay extra each month -- you can pay extra only in the months you feel you can afford it. But if you're able to pay extra each month, you'll pay your loan off even faster and save even more interest.

Why prepay?

The whole point of prepaying your mortgage is to pay off your loan sooner, and to save on interest. The sooner your loan is paid off, the sooner you can stop making monthly payments. And the interest you save is as good as interest you could have made in separate investments. If you invest in the stock market you never know what kind of return you'll get. But if you have a 7% mortgage, then every dollar you prepay gives you a 7% return. In fact, prepayments are worth a little more than separate investments, because income you make from separate investments is taxable, while interest you save by prepaying your mortgage is not.

The only downside of prepaying your mortgage is that it ties up your cash. If you take the money you would have used to prepay your mortgage and invest it in something else, then you'll be able to easily access that cash in case of an emergency. If you prepay your mortgage, your equity is locked up in your house and it's not so easy to access it. You can't easily spend your house.

But as long as you have sufficient savings, I believe it's a good idea to prepay your mortgage (and most financial advisors agree).

How to make prepayments

Making prepayments is easy.Whether you're paying by check or online, there's usually a blank to write in how much extra principal you want to pay. (If not then contact the bank and ask them how to prepay.)

It's really unlikely that your mortgage argreement requires any kind of prepayment penalty, but it couldn't hurt to check it to make sure.

How much should you prepay? That depends on how much you can afford, and how quickly you want to pay off your loan. This calculator shows how much prepayments can shorten your loan and save you on interest.

Balance left on loan

$

Interest rate

%

Current monthly payment

$

Extra paid
each month
Years to
Pay Off
Interest Paid
Interest Saved

$0
$
$

$50
$
$

$100
$
$

$
$
$

 

Should you pay off your mortgage early?

Most financial advisors agree that it's a good idea to prepay your mortgage to save on interest and accelerate your payoff date, regardless of whether you have a 15- or 30-year note. But they don't always agree on how much you should prepay. The Get Rich Slowly blog runs down the advice from the experts:

  • Your Money or Your Life book: Pay off early
  • Suze Orman: Pay off early
  • Charles Givens: Pay off early (prepay next month's principal to pay off the loan in half the time)
  • Dave Ramsey: Pay off early, but put 15% of income towards retirement savings first
  • All Your Worth book: Pay off early, but put only 5% of your income towards prepayments
  • Ordinary Wealth, Extraordinary People book: Don't pay off early

On a separate page I explain the concept of taking the cash you would have spent on prepayments and investing it in something else (and conclude that it's not all it's cracked up to be -- prepayments are usually better).

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