Prepayment Privileges
Definition
Prepayment privileges are the extra payments your contract allows each year without a penalty, usually expressed as a lump-sum percentage plus a permitted payment increase.
How it works
A common arrangement is 15/15: you may pay up to 15% of the original principal as a lump sum each year and increase your regular payment by up to 15%. Privileges range from 10/10 at the restrictive end to 20/20 or better on flexible products.
Prepayments are powerful because every extra dollar goes straight to principal. Applied early in the amortization, when the interest portion is largest, modest annual lump sums can remove years from the mortgage and tens of thousands in interest.
Privileges usually reset each calendar or anniversary year and do not carry forward, so unused room is lost. Some lenders also restrict when payments can be made, which matters if you plan around an annual bonus.
Quick facts
- Typical range: 10/10 to 20/20 annually.
- Extra payments apply fully to principal.
- Unused privileges normally do not carry over.
Put this into practice
Still have questions about prepayment privileges?
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