# 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.

**Unnecessary Interest**

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!

Tags: