Purchasing a home is the most important investment any person would make in his lifetime. But do you feel it is wise to pay for the house throughout your life? May be not. Then another question may arise into your mind and that is - how can you prepay your mortgage loan & if it is worth it?
Prepaying the mortgage means the borrower will pay the full or partial amount before the official due date of the loan term. By paying the loan much before the due date you might cut off a significant amount of interest you would have owed to the mortgage lender. But before going for the prepayment of your mortgage, you should be aware of certain aspects :
The method of repaying the mortgage – People use different methods for prepaying their mortgage. The most popular method is to pay a little extra in each of your monthly payments. People also choose Bi-weekly mortgage payment as an alternative, you will have to make 13 payments in a year rather than 12. Before making the final decision, you must do a calculation to select the most financially effective & affordable method.
First step will be to check whether prepaying is suitable for you or not. Consider prepaying mortgage loan as an big investment (your home). Long-term investment like this will be most beneficial, as at the end of loan term, the mortgage will be paid off, as well as you will gain your full amount ready for a new investment. But this applies for only long term investment where interest is quite high, your savings is less & you do not have any other debts to worry about.
Second step, it is important to know the current interest rate on your mortgage. Mostly, prepaying a 30-year fixed rate of mortgage will be highly beneficial. Also, determine the exact amount of your remaining balance. If your bank statement does not show it, ask your bank or call your lender to find it out.
Your third step should be finding the amount you are paying as interest over the total loan term. For that reason you'll need a mortgage calculator which you can find online. The mortgage calculator will help you get the scheduled payment structure (amortization schedule). Some of the calculators may also be helpful to examine different scenarios like how much you can save if you repay in different rates.
The fourth step is to determine how much you want to prepay. There are several ways through which you can decide your amount:
*You can choose a certain round figure from your savings. It would be easier for you to budget after paying all your expenses.
*Before deducting your other expenses, you can separate a percentage of your gross income (1%, 2% or more) & contribute it as prepayment installment.
*After having a refinance loan, stay fixed to your previous monthly installments which might be much bigger.
*Add your other monthly payments along with your mortgage installments. It may be car loan payments or credit card debt which is not active right now, use it like a add-on towards paying the mortgage.
*Pay the extra amount which you are earning as incentive or as a raise. Your net income will remain intact & you will find a hassle free source of prepaying the mortgage.
*You can divide your monthly mortgage payments in twelve equal parts & pay the 1/12 part along with the monthly payment.
The fifth step will be to make sure your extra payments must be executed to reduce the principal amount. Ask your mortgage lender or financing bank to apply your extra money towards repaying the principal. You lender might ask for a letter or memo to each payment check to initiate the process. Keep an eye on your payments & the prepayment process through bank statements, you must confirm that your extra dollars must applied to repay the loan rather than creating an escrow account.
The sixth step is to consider a bi-weekly plan. If you hesitate to put your effort & separate extra cash from your income, this plan might be useful for you. You just need to divide your each month's payment into two parts & pay to the lender in every two weeks. At the end of the year, you will end up paying one installment extra towards loan. Ask your mortgage company or the lender to set up the payments. Make sure the payments must put to effect immediately. By making extra payment, it is assured that you could substantially reduce the total cost of your loan. While signing the extra payment check, it is important that it should be applied to the principal, not as interest or escrow.
There are some restrictions regarding mortgage repayment. Some lenders have strict rules regarding different mortgages. Mortgage company or lender might ask you to pay a penalty for paying the mortgage before time. It is because they want to prevent borrowers from quick refinance which might cut off the lender's profit margin. The terms of this penalty may change due to different market situations, so you should read the mortgage papers very carefully while signing the mortgage deal.