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| Mortgage Prepayment: Own Your House Free And Clear Faster |
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Should You Prepay Your Mortgage?
We all dream of paying off our mortgages and owning our homes outright. Bad news for the
banks. They will be losing millions of dollars in interest. Therefore we are faced with road
blocks in the form of "prepayment penalties". Prepayments usually run for about three years.
Understand prepayment penalties.
Ask your lender or bank for a definition of their "prepayment". This definition varies from
lender to lender. Some lenders say that a prepayment occurs when you sell the house.
Others say no. Most lenders agree that there is a prepayment when you refinance a
mortgage. Many lenders will waive all the fees or at least a portion of the fee if the
homeowner keeps the mortgage at the bank. If you move the refinance to a new lender then
you pay the prepayment penalty.
If you make an unscheduled payment towards the principal or pay off the entire mortgage
before the loan is due, you will incur a prepayment fee.
Lenders like to include a prepayment clause in the mortgage contract. If the lender is
reselling the mortgages on the secondary market the deal is more attractive to investors.
Somehow, investors feel that a mortgage with a prepayment penalty is less risk. If you do see
the prepayment clause in the mortgage documents you can ask to have it remove or ask for
a lower interest rate.
Prepay in one lump sum payment.
Sometimes we are blessed with having a large lump sum of money. This could be from a
lottery winning, and inheritance or an insurance pay out. Ask the bank for a "pay out
statement". This statement shows how much is required to pay the mortgage in full.
Prepayment strategies to pay off in several years.
>>Bi-weekly payments.
The reason the bi-weekly strategy works is because you are making one extra payment each
year without making an effort. For example, if your monthly payments are $1,000 for the year
you will be paying $12,000. With a bi-weekly plan you pay $500 every two weeks. Therefore
you pay $13,000 for the year, and this gives you an extra $1,000 each year.
>>Pay extra money each month.
To put extra money towards your mortgage, pick an easy number. For example, if you
received a pay raise, or stopped smoking or drinking, and have an extra $200 each month,
use this figure each month. Be sure to specify that the extra money should be going to
principal.
>>Pay lump sum each year.
A lump sum payment each year is one of the easiest ways of prepaying your mortgage. You
might be getting money back from your personal income tax return. Your property taxes and
house insurance might decrease. Use this savings to put towards your mortgage. Whatever
the amount, use it to reduce your mortgage liability.
Should you pay off the mortgage?
Yes. However, if the interest rate on you mortgage is a fixed rate and is below 4.5%, keep
the mortgage. The low interest rate, mixed in with the mortgage interest tax deduction,
makes it difficult to get a better deal.
The downside.
>>Having a house that is paid for, free and clear is money in the bank. However, this is an
illiquid asset. The money is not readily available. If you have an emergency you will have to
wait a few weeks to get some money.
banks. They will be losing millions of dollars in interest. Therefore we are faced with road
blocks in the form of "prepayment penalties". Prepayments usually run for about three years.
Understand prepayment penalties.
Ask your lender or bank for a definition of their "prepayment". This definition varies from
lender to lender. Some lenders say that a prepayment occurs when you sell the house.
Others say no. Most lenders agree that there is a prepayment when you refinance a
mortgage. Many lenders will waive all the fees or at least a portion of the fee if the
homeowner keeps the mortgage at the bank. If you move the refinance to a new lender then
you pay the prepayment penalty.
If you make an unscheduled payment towards the principal or pay off the entire mortgage
before the loan is due, you will incur a prepayment fee.
Lenders like to include a prepayment clause in the mortgage contract. If the lender is
reselling the mortgages on the secondary market the deal is more attractive to investors.
Somehow, investors feel that a mortgage with a prepayment penalty is less risk. If you do see
the prepayment clause in the mortgage documents you can ask to have it remove or ask for
a lower interest rate.
Prepay in one lump sum payment.
Sometimes we are blessed with having a large lump sum of money. This could be from a
lottery winning, and inheritance or an insurance pay out. Ask the bank for a "pay out
statement". This statement shows how much is required to pay the mortgage in full.
Prepayment strategies to pay off in several years.
>>Bi-weekly payments.
The reason the bi-weekly strategy works is because you are making one extra payment each
year without making an effort. For example, if your monthly payments are $1,000 for the year
you will be paying $12,000. With a bi-weekly plan you pay $500 every two weeks. Therefore
you pay $13,000 for the year, and this gives you an extra $1,000 each year.
>>Pay extra money each month.
To put extra money towards your mortgage, pick an easy number. For example, if you
received a pay raise, or stopped smoking or drinking, and have an extra $200 each month,
use this figure each month. Be sure to specify that the extra money should be going to
principal.
>>Pay lump sum each year.
A lump sum payment each year is one of the easiest ways of prepaying your mortgage. You
might be getting money back from your personal income tax return. Your property taxes and
house insurance might decrease. Use this savings to put towards your mortgage. Whatever
the amount, use it to reduce your mortgage liability.
Should you pay off the mortgage?
Yes. However, if the interest rate on you mortgage is a fixed rate and is below 4.5%, keep
the mortgage. The low interest rate, mixed in with the mortgage interest tax deduction,
makes it difficult to get a better deal.
The downside.
>>Having a house that is paid for, free and clear is money in the bank. However, this is an
illiquid asset. The money is not readily available. If you have an emergency you will have to
wait a few weeks to get some money.
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