For most people, a mortgage marks the longest term and the generally most expensive loan they will take in their lifetime. The peace of mind and saved rent the mortgage gives you nonetheless makes it worth the price. There are several ways you can use to reduce the amount you will owe in your home loan and thus own your home at a fraction of the cost you envisioned. One of them is repaying your mortgage early by making higher monthly and annual payments.
Early mortgage repayment nonetheless decreases the profits your mortgage lender in Tempe stands to make from your loan’s interest. As such, most lenders have a prepayment penalty clause in their contracts to minimize or negate their losses should you finish your mortgage repayment early. The prepayment fee you will be charged is based on specific percentages of your outstanding loan amount. This should be communicated upfront by your lender when you are signing your mortgage papers. Even if the prepayment penalty exists in your case, the following are tactics that will minimize its impact and at times negate it altogether.
Exchange the Prepayment Penalty for Other Mortgage Fees
You can negate your prepayment penalty by paying for other loan fees at closing. Some lenders will, for instance, accept the payment of an origination fee in exchange for the prepayment penalty. The origination fee, in this case, helps the lender recoup his/her profits upfront based on your borrower risk level. With the assurance of profits, the lender will remove the prepayment penalty for your mortgage.
Stick To Your Annual Prepayment Limits
Most mortgages have a specified prepayment percentage of the agreed-upon yearly repayments. You can, in most cases, make a lump-sum or monthly prepayment of up to 20% of the loan balance per year. Some also allow you to increase your prepayment limits by 10-20% yearly. Sticking to your limits will negate a prepayment penalty on your home loan.
‘’Port’’ Your Existing Mortgage into A New Property
The majority of borrowers prepay their mortgage when they are selling their home and moving into a new one. If this is your case, consider ‘’porting’’ your existing mortgage into the new home rather than closing it ahead of schedule then opening a new loan. This way, you will have the same interest rate, maturity date, and loan balance in your new mortgage as in the existing one. If you need more money for the purchase of your new property, you can borrow this at your current loan terms.
Refinance With Your Current Lender
Refinancing is the leading choice for homeowners who want to save money on interest and get better loan terms. The best option when you have a prepayment penalty is to refinance with your existing lender. More often than not, this alternative means that your new mortgage will also have a prepayment penalty.
Most people shopping for a mortgage will look for a lender with no prepayment penalty. This is nonetheless a futile exercise since every lender wants to minimize their losses as much as possible and thus has a prepayment penalty. The above tactics are your best choice for reducing or avoiding the impact of the prepayment penalty on your home loan.