The payment of a debt obligation prior to its due date.
Prepayment means paying all or part of a mortgage loan before it is due. Prepayment can save you money in interest, but beware: Some mortgages charge a penalty if you pay them off early.
One form of prepayment is to make accelerated payments on your mortgage. In other words, pay more than the amount due each month, earmarking the extra amount for the principal. Some lenders will allow you to pay half your monthly mortgage amount every two weeks. Over time, the prepayments add up because 11 of the 12 months have more than 28 days, or two, two-week payment cycles.
Another form of prepayment is refinancing, in which you get a new loan to pay off the old loan. You can refinance for a number of reasons, among them to lower your monthly payments or to pay your loan off more quickly.
If there is a penalty for prepayment, it’s generally equivalent to a small percentage of your outstanding balance. The prepayment penalty could also be an amount equivalent to several monthly mortgage payments. The penalty is meant to discourage borrowers from refinancing every time rates drop.
It’s a good idea to weigh the pros and cons to decide whether prepayment is right for you.