What Is Mortgage Prepayment?

Mortgage prepayment means paying additional money toward your mortgage principal before the scheduled end of your amortization. Depending on your mortgage agreement, you may be able to make additional payments without paying a penalty, subject to your lender’s prepayment privileges.

How Can Prepayments Save Money?

When you make an additional payment toward the principal, your mortgage balance decreases faster. A lower balance generally means less interest is charged over the remaining life of the mortgage.

The earlier additional payments are made, the longer the reduced mortgage balance has an opportunity to lower future interest costs.

Example

Imagine you have a $500,000 mortgage and decide to make an additional $5,000 payment every year. Instead of allowing the mortgage balance to decline only through your regular payments, the additional payment directly reduces the principal.

Over many years, those additional payments could help shorten the amortization period and reduce the total interest paid.

Check Your Prepayment Privileges

Before making additional mortgage payments, check your mortgage contract. Lenders can set limits on how much you can prepay each year and may apply charges if you exceed your permitted amount.