Is Mortgage Prepayment a Good Idea?

There are various strategies which you can use for managing your mortgage. Many people choose to repay their home loan early. This option can save you a lot of money, but this is just one side of the coin. Find out more about prepayment and its specifics to decide whether it will be the right strategy for you.

Benefits

When you pay off your mortgage early, you save on interest. This is because interest will be charged for a shorter period of time. You can calculate how much you will save exactly by multiplying the monthly interest amount by the number of months during which you will not have to make such a payment. In most cases, the savings are considerable.

With prepayment, you will have peace of mind that even if bad things happen to you in the future, your house will not be at risk. Additionally, you will own the house fully and this will give you a large equity amount, which you can use to get cheap financing. You can get a home equity loan to finance pretty much anything from improvements to the house to the college education of your children.

Restrictions and Penalties

Many lenders actually make mortgage prepayment more challenging and costlier for the borrower. This is because when they initiated the home loan, they planned a set profit. If this profit is lower, they lose money. As a result, many lenders set restrictions to how much extra money you can add to your installment every month.

Some lenders charge prepayment penalty fee as well. This fee is typically a percentage of the loan's principal amount. Often, the percentage is lowered as the term of the loan advances. There are also lenders who set a very high penalty fee if the loan is prepaid before a certain period of time passes. This period is usually five years.

In general, if you consider using a strategy for paying off your home loan early, you have to check the prepayment terms and conditions in the mortgage agreement very carefully before signing it. If these will prevent you from implementing it or from deriving the expected benefits, there will be no point in using it.

Individual Factors

Even if you will save considerably with mortgage prepayment, you have to be certain that you will be able to pull it off and that it does not interfere with your other financial plans. If you need to save money for covering future expenses which will come well before the expected date of early repayment, then this option may not be right for you. Similarly, if you have to put up with great budget restrictions in order to pay off the loan early, you may not get very far.

The Alternative

You should definitely consider the main alternative to this option which is refinancing. Refinancing can be the better solution. If you are able to secure a lower interest rate on the new loan, you will not only save money but enjoy lower monthly payments. This will leave more cash in your pocket. At the same time, the cost of refinancing can be fairly high and this may reduce the potential savings.

The best way to decide whether mortgage repayment is a good idea is to analyze the numbers.

4 Ways to Come Up With a Deposit for Your Mortgage

The conventional mortgage loans available from commercial banks and smaller lenders require a deposit. This is the share of the home sales price that you have to pay out of your pocket. The rest will be covered by the loan. Typically, lenders require a deposit of 20% of the price of the property. Even if you find a programme with a smaller deposit, you will still have to find a way to pay it. Take a closer look at some of the most effective strategies for doing this.

Saving Money

This is the most effective and cost-efficient option for producing a mortgage loan deposit. The problem is that it is quite challenging for a modern household to save given the high prices and rental rates. That is why it is important for you to have a plan and to follow it strictly. You should calculate a fixed amount of money that you can set aside every month. You can increase this amount as time passes and you start feeling more comfortable about saving. It pays off to put work bonuses, money gifts and tax refunds into your savings account. Saving may take a bit longer, but it is totally worth it.

Government Help

There are two types of programmes which you should consider. You can consider a government backed mortgage loan with a lower deposit. The deposit is typically below 10% of the home sales price. It can be lower as well. This option is highly beneficial, but you will still have to come up with the money. Besides, you have to watch out for higher costs associated with the smaller deposit. There are also saving programmes which you can take advantage of. If you are saving for retirement, you may be able to withdraw a portion of your savings to use for paying the deposit.

Family Help

You can ask your family and more specifically your parents to help you financially either by providing a money gift or by lending the money to you. Even if you can get a small amount of money from them, this will still be beneficial. Every bit helps.

Borrowing from the Seller

This is a strategy which can work if you offer an attractive sales price in a buyer's market. The seller will be more than willing to help you come up with the mortgage loan deposit. You can readily borrow the money at a reasonable rate. Just make sure that you will be able to repay it. Another thing to keep in mind is that such programmes typically have an upper limit on the amount that you can borrow.

Decide on the right strategy for you to come up with a mortgage loan deposit.