Making Mortgage Pre-Payments

One of the best ways to invest your money for current and future benefits is by pre-paying your home loan mortgage. This allows you to receive more money when you go to sell your home, it in many cases reduces your monthly payments over time, it reduces your overall debt, and provides more equity for other financial issues.

One of the first things you should do is talk with your lender. You need to find out if there are any pre-payment penalties, and if so, what those terms are. You should also consult with them to find out if they have a preference as to how you make your pre-payments to assure the ease in getting credit towards your principal with their accounting system. Most lenders, and certainly mortgage loans which are more recent to date, have no pre-payment penalties or terms. However, older loans will have a higher likelihood of some sort of pre-payment terms and conditions. Do your research to obtain the fullest financial benefit.

If there are no penalties, terms and/or conditions which apply towards pre-payment, I have a few suggestions on the way you make your pre-payments. You can divide up your monthly payment amount by 12. In other words, if you usually pay $1,200 per month, divided by 12, this equates to $100. Every month you make your check in the amount of $1,200, write another, separate check in the amount of $100 also payable to your lender. Write in the "memo" section at the bottom left of the check the words "towards principal only". You might even add a little yellow sticky note with those same words placing it on the front of the check for the first couple of months for it to really stand out. Each full payment you make towards principal only each year reduces significantly the time in which you have to pay back the entire loan because it takes off a big part of the interest you pay each year.

You can also use an end-of-the-year bonus, or Christmas money received, and make one big chunk payment a year towards principal. Other ways to make effective pre-payments is dividing your payment in half and pay that amount every two weeks, which will give you the same effect of making an additional payment each year. Be sure, however, you know how much you are paying towards principal each payment. This plan sometimes is better accomplished with the assistance and advice of your lender to obtain the correct principal credit each payment.

Other uses for that extra money you are making pre-payments with can be argued, wouldn't it be better used in the stock market, or pre-paying auto loans or credit cards. The answer is a very subjective one based on your own personal situation, motives and goals. The stock market is always uncertain, especially short term, and car loans and credit cards are other possible big debts you have to contend with with different interest setups. You might even consider spreading a designated amount of "excess" money over all three types of debts. This has to be your call and one you may consider talking over with your accountant and/or attorney.

Besides reducing the principal of your largest debt, you will most certainly benefit when you go to sell your home. You will get more money back in your pocket at the end of the day further allowing you to put a larger down payment on another home, helping you to recycle your equity-building techniques and benefits, or allow you more money to fix up the new place, or to place a good bit of that extra money received towards reducing other debts. The point is, you will reap the benefits in many ways.

Whether you make the equivalent of one extra payment per year, or $500 a year, or $5,000 a year, every bit will help over time. Just remember, consult your lender, your attorney, and/or your accountant so that you gain the biggest and best advantages and benefits from your money. Good luck, and by the way, Happy New Year - may the worst be the best from your past and may it meet your dreams and goals for the future!

PLEASE NOTE: This information is not intended to be legal advice. Your licensed real estate agent cannot give you legal advice. If you have any questions about your legal rights or obligations, you should consult with an attorney.