Mortgage prepaying consists on canceling part or the total amount of the mortgage loan remaining debt. If the type of mortgage loan lets you pay part of the principal and not only interests, then you will be saving money by prepaying your mortgage.
The reason why prepaying part of the principal can save you thousands of dollars is that interests are calculated as a percentage over the principal. If the loan capital is reduced, the interests charged will also be reduced.
Since the interests are the lender earnings, many lenders penalize these practices either by not letting you prepay the mortgage or by charging prepaying fees in order to discourage these practices.
Home Equity Lines of Credit
The difference between the property's value and the remaining of the home loan debt constitutes equity. And the equity you have build on your home since the mortgage loan was agreed, can be used to obtain further finance in the form of a home equity loan or line of credit.
A home equity line of credit is guaranteed with the same asset as the mortgage loan. This line of credit usually carries lower variable interest rates which allows you take advantage of good market conditions and get money at probably the lowest rates on the private financial market.
Combining Both
Prepaying itself lets you save thousands of dollars in interests. But in order to do so you need to save a significant amount of money and make a lump mortgage payment every 4 or 6 months in order to reduce the principal. You will then get fewer interests and thus, lower monthly payments that will let you save even more money each month.
However, you cannot always save enough money to make such payments and if you want to have any reliability in your finances, you will probably want to have an extra amount available for any unexpected situation.
At this point is when home equity lines of credit come in handy. Since they carry low interest rates, these lines of credit are the perfect solution for solving the problem of unexpected situations. Even if you have not save enough money, you can turn to them in order to get extra money and make a mortgage payment to keep canceling the principal.
You will then destine the extra money to repay the amount you borrowed from your home equity line of credit. Moreover, if anything unexpected comes to happen you will have more cash available on your line of credit and will not have to apply for a loan and wait to be approved.
In order to see if this is the solution for you, you need to go through your mortgage loan terms and check if there are any penalizations for prepaying your home loan. Then compare the amount you would save on interests with the prepaying fees and the home equity line of credit costs. If the overall transaction saves you at least a couple of thousands and reduces your mortgage length, then seize the opportunity and start prepaying your home loan.
