Pre Paying Your Mortgage Benefits And Drawbacks

Pre Paying Your Mortgage Benefits And Drawbacks



Pre-Paying Your Mortgage: Benefits And Drawbacks
House payments can take up a​ large portion of​ your paycheck,​ and paying even more toward your mortgage every month may seem like an​ overwhelming idea .​
What you​ may not realize,​ however,​ is​ that paying a​ little more can save you​ thousands of​ dollars over the​ life of​ the​ loan.
Before you​ put all of​ your extra money toward your house,​ consider the​ following to​ make sure it​ is​ best for your financial situation:
Benefits
Prepaying on​ your mortgage can save you​ tens of​ thousands of​ dollars .​
If you​ have a​ loan of​ $100,​000 at​ 8% interest for 30 years,​ you​ will pay $264,​240 in​ interest .​
That same mortgage held for 15 years produces only $172,​080 in​ interest,​ saving you​ a​ whopping $92,​160.
Drawbacks
· It depletes the​ liquidity of​ your finances,​ and you​ won’t have that money immediately available.
· It is​ best to​ have a​ safety net with savings for at​ least 6 months before putting a​ lot of​ extra money into a​ mortgage.
· Paying less interest on​ your mortgage can affect your tax picture (although paying higher interest is​ not a​ valid reason to​ keep a​ mortgage).
· It does not make financial sense to​ pay extra on​ your mortgage if​ you​ are in​ high interest consumer debt .​
Pay off other high-interest debts first.
· the​ lower the​ APR,​ the​ less you​ save .​
You may be able to​ invest your money elsewhere with a​ higher return.
If you​ are serious about prepaying your mortgage,​ consider paying the​ next month’s principal amount with the​ current house payment .​
Early on​ in​ the​ loan,​ the​ majority of​ your monthly house payment goes toward interest,​ often leaving as​ little as​ $40 to​ $60 going toward your principal balance.
Obtain an​ amortization schedule of​ the​ loan from the​ lender,​ realtor,​ or​ online site .​
When you​ are making your January house payment,​ look ahead and make an​ additional payment to​ include February’s principal amount .​
This essentially eliminates one full payment from the​ loan schedule because the​ loan balance after that payment would correspond to​ the​ loan balance shown at​ the​ end of​ February.
Let’s say your monthly payment on​ a​ 30-year $100,​000 loan at​ 8% is​ $733.77 .​
In the​ first month,​ $666.67 of​ that amount goes toward interest and $67.10 goes toward the​ principal .​
The second month’s payment includes $67.55 toward the​ principal,​ so you​ would only need to​ pay that much extra with the​ first month’s payment.
If you​ follow this schedule throughout the​ loan,​ your mortgage can be paid off in​ almost half the​ time.
When you​ are paying extra on​ your mortgage,​ clearly document it .​
Always use a​ separate check,​ and clearly mark the​ loan number and principal prepayment on​ it .​
Using a​ separate check will allow you​ to​ track it​ to​ make sure it​ posts toward the​ principal and not late fees,​ advanced interest,​ insurance premiums,​ or​ tax.
Before starting any prepayment plan,​ check with your lender to​ make sure you​ do not have a​ prepayment penalty .​
You can sometimes get a​ slightly lower APR if​ you​ have a​ prepayment penalty,​ and many lenders will assume you​ prefer that without checking with you.




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