How Mortgage Prepayments Work

One of the best ways to get ahead on your mortgage is by making prepayments—but what exactly does that mean, and how does it affect your monthly payments? Let’s break it down.

Lump Sum Prepayments: How Much Can You Pay?

Most lenders allow you to make a lump sum payment on your mortgage each year without penalty. The amount you can prepay varies by lender, but typically, you’re allowed to pay 10% to 20% of your original mortgage balance per year.

For example, if your mortgage started at $500,000 and your lender allows a 15% prepayment, you could put up to $75,000 toward your balance in a single year.

However, if you pay more than your lender allows, you could face prepayment penalties, so it’s always a good idea to check your specific mortgage terms before making a large extra payment.

Will a Lump Sum Lower Your Monthly Payment?

In most cases, a lump sum prepayment reduces the total interest you pay and shortens your mortgage amortization, but it doesn’t automatically lower your monthly payments. Your scheduled payments typically stay the same unless you renegotiate with your lender or reach the end of your term and refinance.

That said, some lenders offer a recast option, which allows you to make a large lump sum payment and have your monthly payments recalculated based on the lower balance. This can reduce your payments without needing to refinance, but not all lenders offer this, so it’s worth asking about.

Other Prepayment Options: Increasing Your Regular Payments

If your goal is to pay off your mortgage faster but you don’t have a large lump sum available, most lenders also allow you to:

• Increase your regular payments – Many lenders let you boost your monthly (or biweekly) payment by 10% to 20%. Even a small increase can shave years off your mortgage.
• Make extra payments – Some lenders allow you to make additional payments on top of your regular ones, which go directly toward your principal.

The Bottom Line

Prepayments are a fantastic way to reduce your mortgage balance faster and save on interest. Whether through lump sums, increasing your regular payments, or a combination of both, using these options strategically can help you become mortgage-free sooner.

If you’re considering a lump sum payment and want to understand how it fits into your financial strategy, let’s chat—I’ll help you navigate the best approach based on your lender’s terms and your long-term goals.