Colli Real Estate

How does prepaying a mortgage work?

My wife and I have just entered into contract on our first house. We have locked in a 30 yr fixed. We put 25% down. After all is said and done, we should have about 30K remaining for our rainy day fund.

Eric,
Congratulations on not only buying your first home but for doing it so intelligently. Getting a fixed rate loan, making a 25% down payment, and having a large emergency fund have left your totally prepared to get this house paid off very rapidly.
Prepaying your mortgage works beautifully. Just don’t fall for the bank “prepayment” or “biweekly” program. These programs cost you money and you can do it yourself for free. Just write your check or make your online payment for your payment amount plus your extra payment. Your mortgage company may have their own website with an amortization calculator available for your specific loan. I know that mine does. There are plenty of loan amortization calculators on the web. Check out citimortgage.com or dinkytown.com for the calculator. You just enter your numbers into the boxes along with the prepayment amount you want to use and it will calculate the month that your mortgage will be paid off. The prepayments do not reduce the interest rate, that is fixed for the life of the loan. But the prepayments reduce the principal balance which shortens the life of the loan. The more you prepay on the principal, the sooner that you will kill off the mortgage.
As far as taxes go, tax deductions are based on the amount of interest that you pay not on the amount of outstanding principal owed. So there is no effect on the amount of the tax deduction that you receive.

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