Friday, February 18, 2011

Guest Post: 5 Ways to Overpay Your Mortgage

There are obvious advantages to paying off debt as early as possible. First, there’s the availability of more money. Second, nothing feels better than being in a debt-free position. For most people, purchasing a home comprises the largest amount of debt for the longest period of time. Many people no longer find comfort or security in 30-year loans since it means they’ll be in debt for a major portion of their lives. Given the instability of the economy and job market, deciding to pay off a home as soon as possible would insure that no matter what happens, a family has a roof over their heads. There are several options available to homeowners, but there are rules that must be considered before deciding on a particular procedure.

Considerations Before Selecting a Plan
  • While paying down the balance means less interest will be paid, it’s important to find out from the lender whether there are stipulations on the amounts that can be overpaid.
  • Some lenders have little appreciation for paying off mortgages earlier than scheduled. Find out if there’s an early redemption penalty for paying off the loan early, as having to pay a penalty could defeat the purpose of attempting to pay off the loan early. Also, make sure the payments will be credited to the principal.
  • The general rule is to pay off the most expensive loans first. If there’s heavy credit card debt, it may be wiser to concentrate on paying off this debt first since the interest rates are higher (possibly 15 – 20%) than mortgage loan interest rates (approx. 6%).
  • If paying off earlier, the homeowner could fall short if an emergency occurs. Homeowners must remember that money paid into their mortgage will be locked into the mortgage so if needed, the only option may be to borrow by refinancing at higher rates of interest.

Options for Overpaying Mortgages
  1. Make bi-weekly payments instead of monthly mortgage payments. Bi-weekly payments result in 26 weeks of payments which is 13 payments per year instead of the standard 12 payments. With this method, homeowners will find that a significant amount of interest payments and term years can be eliminated. However, if this option is offered, it will likely come with an enrollment fee, and monthly fees to be paid thereafter.
  2. Perhaps choosing the extra amounts to pay and making those additional payments either each month or when convenient is the better thing to do. This method is beneficial because there are no fees attached. Adding as little as $25, $50 or $100 each month can make an enormous difference in the final balance paid and the number of years erased over the life of the loan. Since interest is calculated according to balances due, ask the lender to recalculate the loan periodically so the charges for interest rates can be properly reflected (don’t assume that the lender will automatically do this). Incidentally, it’s best to make the overpayments during the first half of the loan since this is when the most interest will be charged.
  3. Take out the loan for less than the standard 30-year term; the lower the term, the less interest will be paid and the sooner the loan will be paid off. Before signing for a lesser-term loan, homeowners have to be reasonably sure that they’ll be able to make the higher monthly payment, as well as be able to handle all their other expenses and have money left over to take care of the basics like utilities, food, clothing, emergencies and leisure activities. If the loan has been paid off by the time they're ready to sell, homeowners stand to make a sizable profit no matter what the condition of the real estate market.
  4. Plan to make a yearly lump-sum payment. Paying as little as $500 extra per year can result in a substantial difference in the overall amount paid and the number of years it takes to pay it.
  5. Taking the above scenario a step further, by depositing a certain amount of money each month into an interest-bearing savings account, homeowners can then keep the interest earned in the account and make the lump-sum payment with the actual cash balance in the account whenever they choose. Thus, make lump-sum payments and make a little extra money at the same time!

The world of today isn’t trustworthy and the general rule for businesses now is to seriously consider what will be best and most profitable for the business. Therefore, homeowners have to look out for their own best interests and conduct research on their own. With the help of knowledgeable brokers or agents, they should strive to gain the best understanding possible of all mortgage plans and the rules that regulate these plans. Only then will homeowners have reasonable assurances of achieving their goals.

About the Author
David works at Money Choices, an Australian service where consumers can quickly compare home loans from a variety of providers.

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