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Prepay Your Mortgage and Save

When you tally up the numbers behind your mortgage, you will probably discover you will be paying a great amount of interest over the life of your loan. As a result, many individuals regularly choose to prepay a portion of their mortgage loan. Prepayment can save you a considerable amount, particularly if you plan to reside in your home throughout the life of your loan.

Getting Down to Basics

Assuming you have a $200,000 mortgage at 7% for 30 years, your ordinary monthly payment (excluding real estate tax) is about $1,331 payable for a total of 360 months. The mortgage will ultimately cost you an estimated $479,022, which includes $279,022 in interest.

If you pay $50 extra per month, or about $1.64 a day, toward that mortgage, you will cut your total interest payment to approximately $242,597 and you will own your home without a mortgage three years and three months sooner. In other words, the extra money you pay out at the rate of $50 a month will save you an estimated $36,430 in interest.

Obviously, the more money you prepay, the greater your savings. For homeowners who have adjustable rate mortgages (ARMs), the practice of prepaying is especially wise when interest rates are low. Prepaying reduces your debt load if rates go up later, because interest payments are highest and principal payments are lowest at the loan’s inception.

Things to Consider

Is there a downside to prepayment? It depends. You will eventually eliminate the income tax deduction you receive from deductible interest paid. Depending on your tax bracket, the amount of money saved should be reduced to reflect that fact. In addition, if you are sure your stay in your present home is only temporary, prepaying your mortgage may not be as beneficial. It’s important to make a thorough analysis of your options before you proceed.

Another area of concern can be prepayment penalties. While once common, they may be limited or nonexistent on relatively new mortgages. In addition, the competitive nature of lending has led banks, in some instances, to waive penalties and prepayment charges. In order to make prepayments, you can usually add the prepayment to your normal monthly mortgage check and mail one check to the bank.

Before proceeding with any type of plan, consult with your financial professional to ensure your decisions are consistent with your overall financial goals and objectives.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


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