How and why to prepay your mortgage to pay off principal ahead of schedule?

Read your mortgage to see if you can prepay without being charged a fee. If it has no prepayment penalty clause, you can prepay in one of two ways: by increasing your monthly  payments or by paying one lump sum.

If you decide to make larger monthly payments, tell your lender you are going to do so.  Then write these words on each check: Extra principal payment included. Watch your statements; the bank may simply credit the extra money toward subsequent installments rather than reducing your principal. Before making a lump-sum payment, discuss it with your lender.

During the first few years of a mortgage, most of your monthly payment goes toward
interest. If you have a $65.000 mortgage at 13.5 percent, you may pay $200.000 in interest
over a period of 30 years. Prepaying during the first 5 years can save much of that money.

Prepaying may not be to your advantage, however. If you have been paying the mortgage
for 5 years or more, you may have already paid most of the interest. If you have a mortgage  at a low, fixed rate you might want to continue your monthly payments and put your extra
money into a higher-interest savings account or in an investment. The bigger payments may  leave you short of cash. Or you may need the tax deduction your mortgage interest payments allow.

Before making a decision, study your mortgage agreement and examine your financial situation carefully.