Considerations to Make Before Mortgage Prepayment

Prepaying a mortgage sounds like a great idea: By paying the balance early, a borrower can reduce the interest owed to a lender over the life of the loan. However, before prepaying a mortgage, it’s important to learn more about the things listed below.

How Most People Prepay Mortgages

Borrowers prepay mortgages in various ways, but a common method is to simply pay a bit extra on the loan every month. Over the term of a typical mortgage, that can mean thousands of dollars in savings. Others make bi-weekly payments, which essentially means making 13 months’ payments during the year. Before a borrower chooses a method, they should do some research to see which strategy makes the most sense.

Mortgage Prepayment Restrictions

While some mortgages’ terms allow prepayment without restrictions, other loans are stricter. Specifically, some lenders impose a penalty for prepayment. The penalty is assessed on a sliding scale that’s based on how long the mortgage has been held, and in some cases, it’s a fixed, one-time payment. Lenders often impose these penalties if a borrower prepays a mortgage before a certain time has passed, and they do it to prevent the loss of profits.

Refinancing vs. Prepayment

There’s no firm answer as to which payment strategy is more effective because the choice depends on the borrower’s goals. If someone wants to pay less in the long term, refinancing and prepaying can do it. However, if a borrower’s goal is to pay less each month, refinancing alone may be the best solution. In many cases, borrowers can benefit from considering prepayment and refinancing separately. If it’s financially sensible to refinance the mortgage, do it; then, simply prepay the loan at a lower interest rate. It’s important for borrowers to choose a mortgage with few or no prepayment restrictions.

As said here, both prepayment and refinancing have their advantages. Borrowers should consider their full debt load when contemplating mortgage prepayment. If someone has high-interest credit card debt, they’re likely better off paying those debts before prepaying a mortgage. Homeowners can follow Dustin Dimisa on Twitter for more mortgage advice and related information.