Prepayment: do it if you can

When you are shopping for a mortgage, you should choose one that doesn’t penalize borrowers for prepayment. That way, you can pay ahead whenever you have extra money. Prepayment will make your loan end sooner, and help you pay less interest in the long run.

In a nutshell, prepayment means making payments that are over and above the minimum that is due each month. In other words, it involves repaying your mortgage sooner than you anticipated. By making advance payments, you effectively reduce the amount of interest that you ultimately pay.

Of course, it is not in the lender’s best interest to have you pay less interest. For that reason, some mortgages contain a clause that forbids prepayment. Other lenders might charge heavy fines whenever you decide to prepay, which negates most of the benefits you would get from paying ahead.

That said, there are plenty of lenders who do not charge penalties for prepayment. You should make sure to seek out one of these loans.

Prepayment can occur systematically or sporadically. For instance, one borrower might choose to pay fifty dollars over and above his regular payment each month. That would be considered systematic prepayment. Sporadic prepayment involves paying extra whenever you have extra money. For instance, a borrower might prepay with her annual bonus. Another borrower might pay with his inheritance. Either way, the loan will end sooner than the amortization schedule projects.

Some lenders allow you to sign up for biweekly payment, which will also allow you to finish paying sooner and reduce your interest. If you are interested in this method, keep in mind that you will have less flexibility in a financial emergency.