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Real Estate - How Do Prepayments Affect My Mortgage When you obtain a mortgage from a lender, your mortgage usually allows you to prepay some or all of your mortgage in 1 or 2 different ways. An open mortgage allows you to prepay any amount on your mortgage at any time. For example, if you have a $100,000.00 mortgage including you are currently making mortgage payments of $268.72 every 2 weeks at 5% interest, you have the option of paying a particular extra sum of dollars toward your mortgage at any time. It could be a particular extra $500.00 that you have saved, or it might be the entire balance owing, if you won the lottery (lucky you!). If you have a closed mortgage, the means that you are more restricted in the amount of dollars that you might prepay on your mortgage. Depending on the terms of your specific mortgage, you might usually prepay up to 15% pertaining to the original amount of your mortgage once a year, or you might increase the amount of your mortgage payment by 15% once a year, although these terms might vary from mortgage to mortgage. The exact details might be found in your copy pertaining to the Standard Charge Terms for your mortgage. The number pertaining to the Standard Charge Terms might be found on your mortgage document, or you might obtain a copy from your lawyer or your bank. Let's say you have a $100,000.00 mortgage with a closed 5 year term, meaning you are making fixed mortgage payments for a term of 5 years. Your payments are $295.67 every 2 weeks at 6% interest. Your Standard Charge Terms indicate that you are entitled to prepay up to 10% pertaining to the original amount of your mortgage once a year, or you might increase the amount of your mortgage payment by 10% once a year. Therefore, your options for the year are to either increase your mortgage payments to $325.24 every 2 weeks or to pay $10,000.00 down as a prepayment on your mortgage. How will either of these options affect your mortgage? If the was the first year of your 25-year mortgage including you prepaid $10,000.00, the will save you approximately 5 years of mortgage payments, or $38,437.10. In 25 years, your $10,000.00 investment has almost quadrupled in value. Alternatively, if, during the first year of your mortgage, you increased your mortgage payments by 10% from $295.67 to $325.24 every 2 weeks, the will have approximately the same affect on your mortgage, by saving you almost 5 years of mortgage payments. Remember that these options are available to you each including every year that you have your mortgage. If becoming mortgage-free is your goal, consider making a prepayment on your mortgage including watch the years disappear!
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