Mortgage prepayment promises to make the day you've paid off the debt on your home arrive sooner rather than later. You can prepay by adding a little extra to your regular monthly payment; by making one extra payment a year; or by making half a monthly payment every two weeks, which equals one extra full payment each year.
Prepaying can pare years off your mortgage and reduce your total interest. For example, paying $25 extra each month on a fixed-rate, 30-year, $100,000 mortgage at 7% interest saves $18,214 in total interest and reduces the term by more than three years.
Before you get carried away, determine if prepaying is right for you:
Never prepay if you have consumer debt. "Consumer debt should always be the first thing you pay off," says Phil Storms, a Denver certified financial planner. "I've seen people with $30,000 of credit card debt who were happy because they were down to $15,000 on their mortgage."
Make sure to save for other financial goals. People end up house-poor if they've paid off their house, but have not saved for retirement or their children's college education.
Weigh your liquidity needs. Prepaying your mortgage could make you strapped for cash to cover regular bills or emergency expenses. Build a cash reserve equal to at least a few months' salary--more if your job future is unpredictable.
Examine the tax consequences. You may consider prepaying during the peak earning ages of 40 through 60. But because this also is the time you're in your highest tax bracket, you would eliminate your largest tax deduction by prepaying your mortgage.
If you have all these factors under control, prepaying may be a good move. To prepay the right way:
Tell your lender to apply any extra amount to the principal.
Check if there's a prepayment penalty--these are rare, especially at credit unions.
Avoid companies that offer to set up a prepayment plan for you--for a price.
Create your own prepayment plan. If you need help, consult the Credit Union or your mortgage lender.