Do you, as a real estate investor, have a propensity to prepay your mortgages? Or with any financed property for that matter. Some borrowers ride out the loan then pay it off when sold to keep the cash flow maximized. Prepaying on a mortgage note means more cash out of your pocket but an increase inPrepaying a Mortgage equity in the property and helping out your balance sheet.

It used to be that many loans for real estate investors had prepayment penalties which prohibited a borrower from making extra payments without incurring a financial penalty. No longer. Prepayment penalties on loans are almost non-existent. In fact, they might as well be extinct because banks lose certain legal protections when issuing a loan on a property containing a prepayment clause.

Yet there are borrowers who make it a habit to pay a little extra each month on a loan. On a 30 year mortgage, just making one extra payment a year can shave off six or seven years on a note. The extra payment can be a one-time event or divided by 12 and spread throughout the year. Prepaying a mortgage saves on long term interest as well. But prepaying also has another effect and it has to do with the interest rate.

For those who prepay and plan on retiring the note much sooner rather than later, paying for any discount points on a mortgage to lower the rate is an unnecessary expense. The advantage paying a point on a note is lost when the loan is retired early. The same can be said for paying closing costs on a loan. Instead of paying closing costs when buying and financing a property, banks can adjust an interest rate slightly higher then provide a lender credit to be used toward closing costs. This is an especially effective technique for flipping as the rate is less important because it won’t be a factor for very long. If you are one who regularly prepays a mortgage without thinking too much about it, pay less attention to getting the lowest rate possible and more to conserving cash.