No matter how much we don’t like debt, most people reach home ownership with the help of a mortgage. While it may be necessary to put your foot in the door of home ownership, paying off a mortgage as soon as possible has many financial advantages, including saving thousands of dollars in interest payments.
If you want to pay your mortgage more quickly, start by reviewing your documents and noting if there is a mortgage prepayment penalty. In this case, identify in which cases you must pay and how it is calculated.
Pay attention to the penalties for the advance payment
Homeowners with no prepayment mortgages can make extra payments whenever they want at no cost. However, mortgages with prepayment penalties are subject to restrictions. The advance payment options are governed by the terms and conditions of the loan and can vary significantly between mortgages and credit institutions.
Look for the loan documents for the phrases “early disclosure”, “prepayment penalty disclosure” or “prepayment penalty”. Please review the terms carefully before making additional payments to ensure that you are not charged extra for doing so. Mortgages with advance payment penalties are offered in fixed-rate loans of 15, 20, 30 and 40 years and variable-rate mortgages, and the advance payment sanction is often in force until the first five years of the loan.
Mortgage loans can allow borrowers to pay anywhere from 10% to 20% on the mortgage annually, without penalties, using a main deductible. However, a penalty is applied for payments that exceed this limit.
The actual penalty is calculated in a variety of ways depending on the lender and the terms of your particular mortgage. One mortgage may charge 2% of the outstanding loan amount, while another charge six months. When you make extra payments on your mortgage, the mortgage company will not earn as much interest as expected, so it will charge you the penalty for trying to recover part of the loss.
Benefits of prepaying the loan
There are several advantages to paying the mortgage in advance:
- Reduces the total interest paid
- Reduces the number of years in which money is committed to repaying debt, thereby increasing the number of years in which money can be directed to other things, such as retirement savings
- It allows you to withdraw without a mortgage so you don’t have to worry about paying mortgages on a fixed income
- Improve your personal net worth by providing an asset (your home) without a corresponding liability (a mortgage)
- It guarantees tranquility and financial security in the event that your family suffers an income reduction due to loss or illness
How much money can you save?
The interest saved by paying a mortgage in advance is significant, even when mortgage rates are low. For example, a couple that only makes regularly scheduled monthly payments of $ 954, 83 on a $ 200,000 to 4% amortized loan over 30 years pays a total of $ 343, 072, 35. $ 143,072, 35 of which is interest.
If they pay the loan in 20 years, the total interest paid goes down to $ 90.203, 89, for an interest savings of $ 52.868, 46. If they pay it in 15 years, the interest is only $ 65, 620, 89, saving $ 77, 451, 56.
How to pay your mortgage faster
Regardless of whether or not you have a prepayment penalty loan, when you make an extra payment, confirm that it will be applied directly to the loan principal instead of the pending interest or guarantee account, which will not save future interest . Also, consider several other methods to pay the loan faster:
1. Increase the payment of the anniversary date
One way to speed up the completion of mortgage payments is to increase the payments for the mortgage anniversary. However, if the mortgage lender permits it, you can make increases in mortgage payments at any time. If you do not have a prepayment penalty, choose one day a year and increase the mortgage payments. The idea is to commit to increasing the principal payments annually to minimize interest. Some prepayment penalty mortgages allow increases in payment of fixed percentages of 5% or 10% on the anniversary date of the loan.
2. Make lump-sum repayments during the term of the loan
An advance lump sum payment refers to a sum of money applied to the loan principal during the loan term. For mortgages with a prepayment penalty, a lump sum uses part or all of the main deductible. For some mortgages with prepayment penalties, this can be done on any day during the loan period, but the annual total prepayment is limited to a percentage of the original loan amount. Others only allow advance payments in a single payment on the mortgage anniversary date. Mortgages without advance payment penalties do not limit lump-sum repayments.
For example, if a couple pays an additional $ 10,000 loan annually, it will save 12 years of payments and a total of $ 90,287, 02 in the total mortgage interest.
When negotiating the terms of the loan, think carefully about your ability to pay off the loan in advance. While mortgages with penalties can be attractive due to their lower interest rates, if your financial situation changes and you want to start making extra payments, you will face severe penalties and charges.
If you choose a prepayment penalty loan, request a prepayment “privilege” higher than the one offered. If the loan allows an annual advance payment of 10%, ask for 15%. This is something that few people ask and fewer people actually use, so lenders can be flexible to get your business.
If you are really busy paying the loan in advance, choose a mortgage with no prepayment penalty. Yes, the interest rate will be higher, but the possibility of making extra payments of your choice can significantly shorten the duration of the loan, making you faster without mortgages.
3. Increase the frequency of payments
A popular and painless way to pay off your mortgage in advance is to make bi-weekly payments instead of monthly payments. With a monthly payment plan, 12 payments are made in one year, but payment every other week (twice a week) means 26 payments or the equivalent of 13 monthly payments a year. Apply the extra money directly to the main mortgage. This simple process takes years of mortgage.
By simply switching from 12 monthly payments of $ 954, 84 to 26 biweekly payments of $ 477, 42, a pair is reduced to 49, a 4-month mortgage discount and save $ 22, 522, 40 in interest over the life of the loan .
Avoid companies that charge registration fees to organize themselves on a bi-weekly payment plan. Contact your financial institution directly and ask if it can be organized for free. Otherwise, simply send an additional regular monthly payment each year and advise the mortgage lender to apply it directly to the principal.
4. Double mortgage payments
Double the mortgage payments means paying double for each regularly scheduled payment. This drastically reduces the amount of the outstanding loan when the extra funds go to the capital. Carefully check the fine print of your mortgage to see if the amount of the double amount also includes the property tax and the mortgage insurance amount and, if so, confirm that this part goes towards your mortgage and does not languish in a tax or insurance account to be applied against future payments.
If a couple doubles the mortgage payment of $ 954, 83 each month from the time it takes the loan, it will shave 19 years after the mortgage. They will pay in just under 11 years, and will reduce the total interest paid from $ 143,735, 88 to $ 46, 413, 58, saving $ 97, 322, 30 of interest!
5. Make a flat-rate payment on mortgage renewal
For borrowers with a prepayment penalty loan, renewal time is a great opportunity to make larger lump sum payments without mortgage penalties. Apply inheritance, work bonuses or the sale of other assets to the mortgage on renewal to reduce the new loan amount. If it is possible, opt for a mortgage with no penalty upon renewal to allow you to make extra payments whenever you want, and reduce interest costs even more.
Make sure you read the fine print of your mortgage. This is crucial, especially if you think your mortgage includes a prepayment penalty. The best time to pass the mortgage documents is before signing them. It may not seem like something exciting, but hidden in that tiny print are the keys to understanding when and how much you can pay your mortgage. The opportunity to save thousands of dollars in interest should give you a lot of excitement.
Once you have identified any restrictions on your prepay options, start looking for ways to find extra money to reduce your mortgage balance, mortgage interest due and years until you and your family are mortgaged.
What methods do you use to pay your mortgage faster?
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