How to avoid early mortgage payment hassles?
A mortgage loan is usually one of the largest debts an individual has to pay off during his or her lifetime. The monthly payment generally runs in thousands of dollars and even the duration of the loan lasts for decades. Steering clear of the loan by paying it off as quickly as possible can be an enticing prospect for most borrowers who have to repay hefty loans from mortgage loan processing companies. By doing so, they would not only save substantially on the interest being levied on the loan but also have lesser expenses during the later part of their lives.
This is especially helpful during post-retirement period when the income levels may decrease, while the expenses remain the same or might even increase. Higher expenditures after retirement could force the borrowers to sell their investments made during their lifetime, which they may want to avoid. By getting rid of the mortgage, they can also keep their tax bills low as they wouldn’t have to withdraw from their tax-deferred accounts. It would enable them to enjoy maximum social security benefits with minimal taxes.
However, borrowers looking to pay off their mortgage earlier could commit some common mistakes, which can be easily avoided. Discussed below are some of the important points to remember while paying off the mortgage.
1. Get a confirmation of prepayment charges
The sole income of most lenders or lending institutions is the interest they levy on the principal amount granted as the loan. Having worked out a monthly payment for the borrower, they usually divide it into four main components. While a certain portion of the monthly payments goes in paying off the principle amount, the other goes to paying off the interest on it. The rest goes to paying off the third and fourth components that comprise of insurance and Tax. So, when the borrowers make the extra payment and instruct the lender to apply it to the principal amount, the related interest also begins to come down, which in turn can affect the lender’s profitability.
In order to avoid it, the lender may charge a penalty for borrowers who are paying off the mortgage amount quickly. Hence, while looking to pay off the amount in haste and save money, the borrowers may instead lose it in form of penalties. For this reason, it is important to get a confirmation from the lender’s and know if they are charging any penalty for the same, and if it so, then discussing it with the lender is the ideal means to go about it.
2. Ensure the extra payment is paid towards the principal
Lending institutions levy interest as the cost of the amount borrowed in form of the principal. Conventionally, payments made by the borrowers are applied first to specific fees that are due. In most cases, this is the late fee charge in lieu of late payment in previous months. The other part of the payment then goes to pay the interest due. Only then the remaining portion of the payment is applicable to the principal balance of the mortgage loan.
When the borrowers pay an extra amount in addition to the normal monthly payment, the additional amount is applied to the next month’s interest. In this way, the borrower might end up decreasing the interest due, yet the principal amount might remain the same, and borrowers might not be able to pay off the whole mortgage quickly as they want to. Hence, it is necessary to instruct the lenders to apply the extra payment to the principal and not the interest, by which, the remaining loan amount can be reduced and the loan can be paid off ahead of time.
3. Avoid refinancing at meagerly decreased interest rate
Getting your loan refinanced to take advantage of reduced rates can be a good idea, as you can save on the interest of your existing loan. However, if the dip in the rate in not substantial, you could end up paying more in a bid to save money. Also opting for extended loan terms for the refinanced amount would make you pay the loan for a longer duration. Moreover, switching your mortage loan through refinancing can attract some cost, which when rolled over into the fresh loan, could substantially increase the principal, and therefore the interest. Hence, consulting a professional and seeking the right advice is necessary.
4. Cover yourself thoroughly
Borrowers who wish to pay off the interest rate quickly may have to shift the amount from other investment opportunities. By this, they may land themselves in the risk of exhausting their emergency fund. While they can always use their credit card to pay for such exigencies, this could again attract a considerable interest, which can be avoided. Therefore, it is important to cover yourself, which can be done by saving enough money to pay for 6-7 months of expenses. Only when you have a considerable amount in your relief fund, you may consider making extra payments towards your mortgage loan.
The idea of paying off the loan can be ideal when you have an additional source of income which you want to utilize quickly and then save for the future. However, risking your savings to pay off the loan might not be a smart tactic after all