Early mortgage repayment is a popular decision amongst Americans. According to Realtor Magazine, the average number of years a homeowner will stay in their home and pay the mortgage is 8.05 years. However, people are often wary of taking short-term mortgages due to high monthly payments and uncertainty about the stability of the economy and their financial well-being. So, it’s obvious they prefer to reinsure themselves and take out a loan for a more extended period.
When is it beneficial to repay your mortgage early?
Before considering paying your mortgage early, contact your bank or mortgage broker to verify the terms of your loan. Often banks will penalize you for paying off your mortgage early or only allow you to make payments within specific parameters.
In any case, remember that the benefit of early repayment depends directly on the remaining term of the loan – the closer to the end of the loan, the less advantageous it is to make early repayments. So, in the long run, it is more beneficial to shorten the term. But if you choose to reduce your monthly payment, you’ll feel the savings right away.
Early repayment options
There are several options for early repayment: reduce your monthly payment, reduce the term of your mortgage, or combine both options. To choose the right choice, consider what is more important to you – paying less money to the bank or reducing your monthly payment to reduce your current expenses.
– Shortening your mortgage term
It is the most advantageous option for minimizing your loan overpayments. When you shorten the term, the part that goes to repay the principal increases in the monthly payment, and the part that goes to repay interest decreases. Therefore, further repayments are more dynamic because less interest is charged on the smaller amount, and overpayments are reduced.
– Reducing Mortgage Payments
Suppose you reduce the payment and keep the term. In that case, the principal balance is stretched over the remaining period, and the schedule is rearranged. Subsequently, most monthly payments go to interest, and a smaller portion goes to the principal.
The ideal option is to alternate between reducing the term/payment amount, conditionally reducing the payment on both sides, making the term and payments as comfortable as possible for even greater financial ability to make early repayments. If your budget allows it, you can make a large one-time payment and reduce the mandatory payment amount while continuing to pay the total amount set before.
These small overpayments will also be an early repayment, and you can use them to reduce the payment term. This scheme is convenient if times get tough, the borrower can pay the minimum mandatory payment and reduce the duration of the loan and overpayments in the months when it is comfortable for the budget. The downside is that the final interest overpayment will be higher than if the loan term is shortened.
In general, it is more advantageous for borrowers to agree to a shorter loan term because, in this case, the overpayment to the bank, that is, the accrued interest, is reduced. However, it is up to you to decide which prepayment option would be better for you since many factors should be considered when making this choice: your living situation, your present financial situation, your long-term plans for the future, and so on.
LBC Mortgage specialists will be happy to advise you on early repayment options and calculate how much you can save. Call us today!