Many people are shocked when they realize how much interest they are actually paying on their mortgage loan. Even a fixed mortgage can result in high interest charges, especially over a period of 20 or 30 years. By the time a 30-year fixed mortgage term concludes, the homeowner has paid significantly more than the property’s original purchase price ― thanks to interest. The interest charges on a fixed mortgage, even one with a low mortgage rate, can really add up when carried out over three decades.
To combat the high price of interest, many savvy homeowners choose to prepay their fixed mortgages to reduce the amount of time they have left on their loans. By shaving some years off the loan term, you can reduce the amount of interest you pay overall.
How to Prepay Your Fixed Mortgage
Before you start sending in extra payments, it’s important to be sure that you are permitted to make prepayments on your fixed mortgage. Review your loan terms and note that some mortgage lenders charge borrowers a “prepayment penalty.” In some cases, the penalty is so large that it basically negates your potential savings ― lenders do this because they know they’re losing interest money if you repay your debt sooner. You should verify that there are no prepayment penalties before you sign the mortgage contract. This will provide you with the option to pay-off your fixed mortgage early if you are able to.
In some cases, a homeowner may find that prepayment is fairly easy. A windfall from an inheritance or other large sum of money may allow you to make prepayments on a fixed mortgage. Another tactic that some people use is to make bi-weekly payments on their fixed mortgage, which means that a payment is made every two weeks (instead of once a month). The way the bi-weekly schedule works out, you actually end up making the equivalent of one extra mortgage payment each year. Depending on your particular loan, you may be able to reduce your mortgage term by four or five years and save thousands of dollars in interest. However, not all lenders are willing to set up a bi-weekly payment system.
If you cannot consistently prepay your fixed mortgage, you may try making additional payments whenever you have the funds. You could consider making a principal reduction payment every so often (e.g., when you get a salary bonus or have extra money in your budget). That way, you can save on interest while working to pay-off your fixed mortgage a little sooner.