Want to pay off your mortgage faster and save on interest? Understanding and using your prepayment privileges is essential. Strategic use of these privileges can save you tens of thousands of dollars.
What Are Prepayment Privileges?
Prepayment privileges allow you to pay extra toward your mortgage principal without penalty. Using them strategically can save you tens of thousands of dollars.
Types of Prepayment Options
Lump Sum Payments
- Typically 10-20% of original mortgage annually
- Applied directly to principal
- Can be made once or multiple times per year
Payment Increases
- Increase regular payment by 10-25%
- Extra goes to principal
- Often called "double-up" or "increase" privileges
Accelerated Payments
- Bi-weekly instead of monthly
- Equals one extra monthly payment per year
- Simple way to shorten amortization
How Prepayments Save Money
On a $500,000 mortgage at 5% over 25 years:
| Strategy | Result |
|---|---|
| Extra $200/month | Pay off 4 years early, save $74,000 |
| $10,000 annual lump sum | Pay off 8 years early, save $132,000 |
| Both combined | Pay off 10+ years early, save $160,000+ |
Small consistent extras have huge impact.
Want to Pay Off Faster?
Let us help you develop a prepayment strategy that fits your budget.
Strategies to Maximize Benefits
1. Use Tax Refunds
Direct your refund to mortgage lump sums.
2. Apply Raises
When income increases, increase mortgage payments.
3. Round Up Payments
Pay $2,000 instead of $1,847.
4. Anniversary Lump Sums
Use your full annual prepayment allowance each year.
5. Set Up Accelerated Bi-Weekly
One extra payment per year without thinking about it.
Compare Before You Sign
Prepayment privileges vary significantly:
| Lender Type | Lump Sum | Payment Increase |
|---|---|---|
| Big Banks | 10-20% | 10-100% |
| Credit Unions | 10-20% | Varies |
| Monoline | 15-20% | Up to 100% |
If prepayment is important to you, consider this when choosing your lender.
Don't Exceed Your Limits
Prepaying beyond your privileges triggers penalties. Know your limits and track your usage.
FAQ
Q: When should I make lump sum payments?
A: Earlier in your amortization has more impact, but anytime helps.
Q: Do prepayments reduce my next payment?
A: No. They shorten your amortization. Your payment stays the same (unless you increase it).
Q: Can I decrease my payment after making extras?
A: Some lenders allow "recast" after significant prepayments. Ask your lender.
Q: Are prepayment privileges negotiable?
A: Sometimes, especially with broker-negotiated mortgages.
What's Next
Develop a prepayment strategy that fits your budget. We'll help you choose a mortgage with the right privileges for your goals.
Ready to Get Started?
Contact us today for personalized mortgage advice and competitive rates.
