Paying Off Your Mortgage, in Advance
Paying off your mortgage ahead of schedule can be an option as it allows you to reduce the amount of interest owed to the lender ultimately saving you a sum in the long run. However before you decide to make prepayments on your mortgage it’s crucial to be aware of the following points;
How Do Most People Make Prepayments on Their Mortgage?
There are ways in which people choose to make prepayments on their mortgages. One popular approach is to add an amount to your monthly loan payments. Over the course of the loans duration this strategy could potentially save you thousands or even tens of thousands of dollars.
For instance lets consider a scenario where you have a balance of $100,000 on a 30-year loan with an interest rate of 4 percent. If you were to follow the payment schedule you would end up paying around $71,000 in interest over time. However by adding $75 per month towards your payments not only would you save over $17,000 in interest but also manage to repay the loan more, than 5 years earlier.
Some individuals also opt for weekly mortgage payments, which effectively means making 13 months of mortgage payments within a year instead of the usual 12. Before deciding on a payment method it’s essential to crunch the numbers and assess which approach is financially advantageous and feasible, for you. Our mortgage calculator can assist you in determining your mortgage expenses.
Are There Limitations on Early Mortgage Repayment?
While certain mortgages allow repayment without restrictions others come with stringent terms. In particular certain lenders impose penalties for prepaying the mortgage. The penalty amount may vary based on how you’ve held the mortgage (for instance prepaying after one year might incur a fee to 4% of the total loan amount compared to a penalty of 3%, after two years) or it could be a fixed one time charge.
Lenders often enforce prepayment penalties when borrowers repay their mortgages before a specified period around five years. This discourages borrowers from refinancing their loans and potentially diminishing the lenders profits.
There are factors to consider when it comes to these penalties, including the fact that some lenders do not view the sale of a home, as a “prepayment ” while others allow an amount of payment before the penalty is applied.
The terms of the prepayment penalty can differ significantly so it’s essential to review your mortgage documents. Usually you will come across terms like “prepayment penalty disclosure” or “prepayment disclosure,” which will provide details about the prepayment penalty.
To determine whether to refinance, prepay or both there isn’t a right or wrong answer. First and foremost you need to consider your goals. If your objective is to reduce the amount you pay to the lender in the run both refinancing (by lowering your interest rate or shortening the loan term) and making payments, towards your mortgage (by reducing the total owed amount and shortening the loan term) can help achieve this goal. If your primary aim is to lower your payments refinancing may be more suitable. On the hand if paying off your mortgage quickly as possible is your main priority focusing on prepayment might be more beneficial.
However it may be advantageous to think about refinancing and prepayment as considerations.If it is financially beneficial, to refinance then proceed with the refinancing process. After that you can make payments on the loan, which has a lower interest rate. Just make sure to choose a loan that allows for either no prepayment restrictions or reasonable ones.
Keep in mind that it is important to consider all of your debts when contemplating prepayment. If you have debt with interest rates, like credit card debt it would probably be more advantageous to prioritize paying off that debt before focusing on reducing your lower interest loan.
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