What is a pre-payment privilege?
What the Prepayment Privileges Ratio Actually Means
When you sign paperwork for your mortgage the prepayment privileges will be part of that mortgage. They are usually stated as 15/15, some lenders have products that are 20/20. Sounds like vision right? wrong. The first number is the % by which you can increase your regular payments. The second number is the % of your original mortgage that you can apply lump sum payments each year. Here is an example with actual numbers.
If you have a mortgage of $340,000 at a fixed interest rate of 2.36% amortized over 25 years. Your monthly payments would be $1499 and the interest you would pay the lender over the lifetime of that mortgage would be $109,845. We like to refer to this amount as 'unnecessary interest', by utilizing your prepayment privileges in a smart and calculated way we can decrease this amount and put that cash back in your pocket where it belongs!
Increase Regular Payments
Say your prepayment options are 20/20. If you could afford to put an extra $299.80 (20%) on each payment your new monthly payment would be $1798.80 per month. By doing this you would pay off your mortgage 5.25 years sooner and save yourself $24,862 in unnecessary interest payments to the lender.
Lump Sum Payments
Now what if you get a bonus check once per year from your work or Christmas money from grandma and want to take advantage of the lump sum payment option. If the same example allowed you a 20% lump sum payment each year that would be $68,000 you could pay off each year of straight principle. Say you actually got a bonus like that and maximized out this option then you would pay off your mortgage in 4.92 years and save yourself $89,453 in unnecessary interest. Let's be more realistic and say you have an extra 2% per year to put onto your mortgage. This would be an extra $6800 per year in this example. This scenario would have you paying off your mortgage in 16.92 years and saving $37,619 in unnecessary interest over the lifetime of your mortgage.
Let us help you figure out the actual numbers on your mortgage
There are ways to use these prepayment options to your advantage to save you a lot of money. It is my goal to save you as much as possible and help you to figure out which of these options works best for you. I am always happy to advise PRO BONO whether I placed your mortgage or not. All you need is to bring in your mortgage statement and know what your pre-payment privileges are and we can help you create a plan to pay your mortgage down faster. We love finding ways to save you some of that unnecessary interest!