Get Answers about Mortgage Prepayment
A mortgage is a big and intimidating liability that can take several decades to clear. Most borrowers find it extremely disheartening to see how slowly the principal reduces as a big proportion of each payment goes towards amortizing the principal. Knowing the benefits of mortgage prepayment can help you set goals to be debt free.
It is not surprisingly that the motivation to pay off the debt is at its lowest when the debt is highest. Conversely, the rate of payment seems to increase when only a couple of years are remaining on the mortgage. If you have the same tendency, you are not alone; this is human nature.
In this piece, I will answer a few questions about mortgage prepayment and implementation. Once you have seen the benefits of prepayment, then maybe you will lay down some strategies towards clearing off the debt as early as possible.
What Charges Apply For Mortgage Prepayment?
Prepayment charges apply in several cases:
- When you exceed the payment amount stipulated by your privileges
- If you want to refinance your mortgage
- In case of mortgage renegotiation
- when you transfer your mortgage
The amount your lender charges will depend on factors such as interest, the number of remaining months and amount of prepayment.
Owing to the dynamism of these factors, don’t be surprised if you realize that your charges change regularly.
I Don’t Know How Prepayment Charges Are Calculated
The two common methods of calculating prepayment penalties are interest rate differential (IRD) and three-month interest.
The factors that influence IRD include remaining term, current interest rate and original interest rate. Because this calculation is a bit complicated, I would suggest that you an online calculator to estimate your charge.
Do you have a discounted rate? Consult your lender and review the mortgage terms to see whether and how different types of interest rates apply.
What Privileges Come with Mortgage Prepayment?
Your mortgage lender may offer terms that allow you to exceed your regular payments without attracting a penalty. These privileges vary from one lender to another. The effect of such overpayments is a reduction of the amount of interest you would have to pay over the life of the mortgage. It is also a way of reducing the mortgage time by as much as five years.
How Can I Avoid and Reduce Prepayment Charges
Shopping for a mortgage is just one of the several ways of reducing the amount of prepayment penalties. Other eligible methods are porting the mortgage, exhausting the mortgage privileges and waiting until the end of the prepayment term.
If am shopping for mortgage, what should I ask about prepayment?
When shopping for a mortgage, you need to insist on getting full information about the prepayment amount that does not attract charges. It is also important to get clarification about the ideal time to make prepayments. In addition, remember to ask the lender about the amount of fees and their calculations.
If you are buying a home for the first time, you may be worried that this is going to take forever to pay off. However, like the analogy of a stream water falling incessantly on a rock, a little prepayment at time, especially if you start early in the life of the mortgage, can remarkably reduce the time you are under the bondage of mortgage.