Paying extra on your home loan can make good financial sense.
It really means a guaranteed return on investment, which isn’t the case for other investments like stocks or mutual funds.
If your current mortgage interest rate is, say, at five percent, you are guaranteed to “earn” five percent — by saving interest — on any amount of principal you pay off.
Borrower Options
Most conventional, FHA, and VA loans allow the borrower to make extra payments (known in the industry as prepayments), without any penalty or fee.
To be clear, making extra mortgage payments might not be the right strategy for everyone, however.
Homeowners often refinance instead, into a 15- or even ten-year mortgage. This drastically cuts their interest rate and slices years off their mortgage.
For shorter-term loans, sometime is the 3% range, make refinancing a very attractive proposition.
Deciding to refinance or make additional payments takes some examination, but the right choice could help you save thousands in interest and get you closer to a mortgage-free life.
Find out more here, from The Mortgage Reports
Big Savings
By making extra principal only payments, the savings could be huge.
For example, a 30-year fixed-rate mortgage at 4% and $200,000 borrowed would require about $140,000 in interest over the life of the loan.
But if you were to prepay just an additional $100 a month toward principal, you would save about $30,000 in interest, and pay off that loan five years quicker.
Here’s another prepayment benefit: unlike the capital gains and dividends earned on other types of investments like stocks and bonds, the savings earned from prepayments are not taxable.
In many cases, taking a longer-term loan at 30-years might be a great option – especially if you pay off the principal faster. You get the flexibility of a smaller monthly payment, but can pay the mortgage down quicker, if you choose.
I’d be more than happy to sit down and talk with you about mortgage term related options. Contact me here for more!
