Many people have a little extra money left at the end of the month or get bonuses in their work. It sometimes crosses a home owners mind that hey, I could pay my mortgage loan off faster if I put this extra money towards the loan.
This is absolutely true! If you have extra money, why not work to pay off that looming mortgage? Depending on how much you pay every month, it can cut the months or years off the life of the loan, and in turn, pay less interest!
When you pay the mortgage payment every month, there is a remaining balance and interest is charged on that amount. When you overpay for that month, the total remaining balance decreases, causing you build the equity faster in the home! Why wait those 25 years to build up all that wonderful equity in the home when you can do it in less by simply overpaying when you have the money?
In some cases, when that total balance remaining decreases, the interest is calculated on that remaining amount, causing the interest to be less than it normally would be, because there is less of a remaining balance. You can save thousands of dollars in interest.
There is something you need to look out for, however, and that is prepayment penalties. These are fees charged for paying off the mortgage loan early. This fee is usually a percentage of the total balance when you pay it off. If the balance is very large, you may want to weigh the benefits against the amount of money you will have to pay if you pay the entire balance off. Perhaps it would be better to ride it out.
Prepayment penalties are discussed and agreed to when the terms of the mortgage are being established. If you have decent credit and have a steady income, there is really no reason for you to have a prepayment penalty. Present your case and tell them you don't feel a prepayment is appropriate for your mortgage. If it becomes an issue, there are so many competitors, go to someone else! They will be more than willing to discuss the terms you want to get your business. Shop around and find someone who will do your mortgage without prepayment penalties.
Prepayment penalties are basically the way a lender makes his or her money in interest regardless if the mortgages are paid throughout the entire life of the loan or early. They are guaranteeing that money that would be paid through the life of the loan. Don't agree to it if you can.
If you are in doubt about paying off your mortgage early, speak to a financial advisor or the lender. They may be able to help determine the best way to handle any payment penalties and possibly saving money in interest while building the equity in the home sooner than when the mortgage would be paid in full. Remember negotiation works in a competitive market so don't be afraid to ask for what you want. It is better than later finding out you could have saved thousands of dollars!
John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: http://www.scourtheweb.com/mortgage/.
