What Is Prepayment?

Sometimes, mortgage lenders give their clients the choice of making their mortgage payments before they are actually due. They call this prepayment and it applies when people pay a portion of the loan early or they could be paying the entire amount. People like to do this because over the length of a loan, the lender is charging a lot of interest.

For example, suppose it is a 30-year loan. The lender would have looked at the borrowers’ financial situation, how much they owe in debt, how much they earn, what their credit scores are and their work history. If after they have thoroughly examined these people’s finances they discover that these people have a risk of defaulting on the loan, they offer these people a higher interest rate.

If the interest rate is a fixed rate, then it will remain at that amount throughout the entire term. If the interest rate is at six percent, these people will be paying this amount in interest every month. It can also be an adjustable rate. The borrowers, in these cases, are given a low introductory interest rate that, generally, lasts for five years. After this period is over, their rates will be adjusted to a higher rate.

Ways to Prepay a Mortgage Loan

People can prepay their mortgages in two different ways. In the beginning of a mortgage loan, most of the monthly payment goes toward interest. People can choose to designate more money toward the principle by paying above the amount that is due. They can do this every month if their lenders allow it.

The other way to prepay a mortgage is to refinance. Refinancing would mean that people are obtaining a loan that will completely pay the first mortgage in full. People like to refinance so that they can obtain a lower interest rate that lowers the amount they pay each month and it also helps them pay these loans off at a faster rate.

Why People Think of Prepaying Their Mortgages

Whether it is a fixed rate or an adjusted rate, people are paying a lot of money in interest over the life of their loans. If they discover that they have a little extra money, they may decide that they would like to put it toward paying down their mortgage principle. The lenders aren’t always in favor of this idea. They like people to have long terms, like 30 years, where they will be paying interest for a long time on their mortgage loans. It reduces the money they will make if their clients are prepaying their mortgages and to discourage this practice, they will charge a prepayment penalty.

The Prepayment Penalty

When lenders write mortgage contracts, they guard against the risk of prepayment by writing into the contract that there will be a prepayment penalty if the borrower decides to pay the loan early. Some lenders charge a percentage on the remaining principle as the penalty for paying early. Other lenders will charge several interest payments that the borrower would have paid if the loan were left in place.

Adjustable rate mortgages are typical loans that will have prepayment penalties a lot of the time. People have a huge incentive to refinance these types of mortgages after they have adjusted to a much higher rate and to ensure this doesn’t happen too often, lenders write prepayment penalties into their contracts.

They may also discourage people from selling their houses, which would cause them to pay their mortgages in full earlier. Generally, the contract will state that a prepayment penalty will apply if the house is sold before five years have passed. This way, they can keep people from wanting to sell their houses too quickly.

Ways to Avoid the Prepayment Penalty

1. Accept a Higher Interest Rate. When people are accepting an adjustable rate mortgage or they are being offered a very low interest rate, they have reason to suspect that the lenders will write a prepayment penalty into the contract. Make sure to ask this question before accepting the interest rate. If the prepayment penalty is motivating them to offer the lower rate, offer to pay a higher rate to have the prepayment penalty left out of the contract.

2. Shop Around. People don’t have to accept the terms that lenders are offering them. They can go to another lender who will be willing to give them a loan without a prepayment penalty.

3. Hire a Real Estate Attorney. Attorneys will be able to give their clients the best advice on how to prevent a prepayment penalty from being written into a contract based on their personal situations.

4. Ask for a Waiver. Lenders aren’t usually insistent on a prepayment penalty for selling the house, but they aren’t necessarily going to tell their clients about it. People must make sure to ask them to remove this clause from the contract and they will, most likely, do so.

5. Ask to Have the Prepayment Penalty Removed. If the loan’s contract has already been written, it’s not too late to avoid the prepayment penalty. Good paying customers are in the best position to be able to have their prepayment penalties removed from their contracts. All they have to do is ask.

There are many factors to consider when refinancing a home mortgage. What you have to keep in mind is that mortgage refinancing does not alleviate your obligation to pay off a debt, but a tool to restructure your existing debt obligation(s) to better your total financial picture. The first thing that you will want to do is determine what your objectives are to see if refinancing is the right thing to do.

The most common reason many people refinance their mortgage loan is to save money when market interest rates are lower. Closely related to this reason include those who have a variable interest rate mortgage and their low introductory interest rate is about to increase to a rate that is higher than what the individual may qualify for with a current fixed rate.

Financial institutions charge money for a variety of reasons when offering any mortgage to people, whether an original contract or a loan refinance. Homeowners need to consider how long they intend to stay in their current home along with how much they will save in interest. Unless you plan to remain in your home for more than three years, there is a chance you may lose money by refinancing.

Some people refinance their home mortgage in order to make their mortgage easier to pay due to decrease in income. This should be done if there is a decent amount of equity in the home, and/or the interests rates are around a percentage point or more lower than what your current rate is at. If a homeowner in this situation is experiencing difficulty with making the mortgage payments, obviously timing may be very critical in order to prevent foreclosure. You would want to refinance the mortgage loan well before becoming delinquent with your existing mortgage payment and/or other bills, such as credit cards. The reason for this is that once an individual starts making payments late or even missing payments, the consumer’s credit rating begins to lessen, making the best mortgage terms, and in effect interest rates, more difficult to obtain. By refinancing your mortgage loan and obtaining a lower mortgage payment, you may be able to prevent making late payments or missing them.

Homeowners often refinance their home mortgage loans in order to obtain money that they have in the way of equity in their home. You may need the money for a variety of reasons, medical expenses, education, major home renovations that add value to the home or consolidation of credit cards that charge a higher interest rate than current market mortgage interest rates. Home interest rates are almost always going to beat any other kind of interest rate in terms of percentage, so if there becomes a substantial amount of money owed through another avenue at a high interest rate, it very well may be worth trying to consolidate.

One should use caution when contemplating refinancing a home mortgage loan for spending money on luxury items and items that depreciate over time. Such items include automobiles – unless for business purposes, vacations, etc. In addition, if the purpose of refinancing a home mortgage is to eliminate credit card debt, the homeowner should make sure that they do not continue to use their credit card(s) to create additional debt.

Some homeowners refinance their home mortgage loan in order to restructure the loan so that they can pay it off sooner. Getting a raise at your job could easily result in a desire to pay off a home loan early. Perhaps they would like to pay down a portion of their mortgage so that they can enjoy lower payments while still paying off the loan faster. People in this situation have the luxury of being able to wait for favorable market interest rates.

Whatever a homeowner’s needs are for refinancing their mortgage loan; they may wish to obtain the services of a mortgage broker. A mortgage broker is a professional who works with many lenders locally, regionally and nationally. Many financial institutions will offer better mortgage terms through a mortgage broker than they would for a homeowner who attempts to obtain a mortgage on their own. A mortgage broker also knows which lender is the best fit for a homeowner based upon the homeowner’s unique financial circumstances. Mortgage brokers charge a commission but in many instances, the financial institution offering the mortgage pays that commission, which is part of the financial package that the broker presents to the homeowner.

As you can tell, there are a lot of different things to take into consideration. It’s a big financial decision, but run the numbers, and see if it could benefit you based on your current goals.

Sure you might be tempted to get a huge house with thoughts of how it’d serve your family in the future and how the cheap they come these days, but there are expenses with a large home that you might not be ready to factor in. Here are just some of the common expenses associated with bigger homes.

Mortgage. The larger the home, the more expensive it is. That’s a fact. So if you’re financing the payment for your big home, then you’d be paying for a larger amount and interest on a larger amount will always be larger.

Taxes. The higher the value of your home, the higher the taxable amount.

Furnishing. Since you have a larger space to dwell in, that means that you need to have more furniture to decorate the place with.

Maintenance. More space means more area to clean and maintain. More toilets and baths means more pipes and plumbing to worry about. Imagine having to reshingle a roof that covers a wider area.

Community rules. If you happen to get a place in one of the more exclusive communities then you might have to follow certain rules. Like keeping your grass at a certain length.

Utilities. A larger space also means more area to light, to cool, or warm. And that’d mean higher electricity and gas bills.

So unless you you can afford it, think real hard before you get a larger place. Think of your needs first before jumping into the impulse of getting a larger home just because you can.

A loss in property value

Homes can decline in value no matter how much you protect your house. Even the most brilliant home buyers can’t say what will happen next. So the best thing you can do is to take precautions – by a house in a low-crime area, where sources of employment are aplenty, or ask the city government about future development plans, etc.

Overwhelming maintenance cost

Incurring a number of maintenance bills is unavoidable once you become a homeowner – so that’s like fearing your own shadow. But never forget to have a home inspection before buying a house. In this way, you wouldn’t be surprised once the sink’s broken pipe floods the kitchen days before you paid for the house.

Buyer’s remorse

Nobody likes regrets. So before buying a house, list all the things that you’re looking for, including the limit of cash you’re willing to spend for your ideal home. Don’t get lazy to look around and don’t be afraid to walk away from a house.

Being unable to afford your mortgage payment

It pays to have an emergency fund. With a month or two’s worth of salary set aside, any future problems, such as unemployment, can be buffered.

Tricky mortgages

If you feel you’re not ready to manage mortgages, you have two choices: first, you can always educate yourself about it; and second, try getting a 15- to 30-year fixed-rate mortage – they’re the most basic and the most foolproof.

http://financialedge.investopedia.com/financial-edge/1110/November-4-5-Real-Estate-Fears-That-Keep-You-From-Buying—Slideshow.aspx

Real estate fears that keep you from buying

Buying a house can be one of the largest purchases of your life. Being paranoid and hesitant about so many things is perfectly understandable, especially if you’re buying one for the first time. But don’t let fear hinder you from having your home sweet home. Here are the most common reasons for holding off on purchasing a home and how to overcome them.

A loss in property value

Homes can decline in value no matter how much you protect your house. Even the most brilliant home buyers can’t say what will happen next. So the best thing you can do is to take precautions – by a house in a low-crime area, where sources of employment are aplenty, or ask the city government about future development plans, etc.

Overwhelming maintenance cost

Incurring a number of maintenance bills is unavoidable once you become a homeowner – so that’s like fearing your own shadow. But never forget to have a home inspection before buying a house. In this way, you wouldn’t be surprised once the sink’s broken pipe floods the kitchen days before you paid for the house.

Buyer’s remorse

Nobody likes regrets. So before buying a house, list all the things that you’re looking for, including the limit of cash you’re willing to spend for your ideal home. Don’t get lazy to look around and don’t be afraid to walk away from a house.

Being unable to afford your mortgage payment

It pays to have an emergency fund. With a month or two’s worth of salary set aside, any future problems, such as unemployment, can be buffered.

Tricky mortgages

If you feel you’re not ready to manage mortgages, you have two choices: first, you can always educate yourself about it; and second, try getting a 15- to 30-year fixed-rate mortage – they’re the most basic and the most foolproof.

Investopedia

Here are five ways to make sure you pay your mortgage quickly:

Put up a higher down payment. Higher down payments mean that you only have to finance a lesser amount. That also means less principal on which interest will be charged. This can allow you to either draw out a longer term (bad) or deal with a more manageable

Go for a shorter term. Longer terms means interest will be piling on for long. Shorter terms often. You just have to balance this out with the a comfortable amortization since shorter terms means you have to pay larger amounts monthly.

Make more sizable payments. If you’re already into your mortgage, ask the bank if you can increase your monthly amortization. Just make sure that you make the terms clear since some loan programs might not really give you a better value even if you pay more quickly.

Make more payments. If possible, try making more payments. Switching from a monthly to a bi-monthly arrangement may help you hack away at the remaining debt.

Refinance to lower interest rates. Refinancing’s a really tricky thing but if you can work out a better deal, then consider it. Crunch the numbers. If, in the end, you’ll be handing out less money with refinancing, then go for it.