Pros and Cons of Getting Ahead on Mortgage Payments - Ann Arbor MI - Real Estate One Matt Dejanovich

The premise behind prepaying a home mortgage is to pay off debt faster to avoid paying interest. Many people have a goal of paying off a mortgage before retirement, but it may be possible to pay it off even earlier.

Investment Comparison

By making larger initial payments to pay off a loan early, one can save money that would usually get funneled into interest. Once the mortgage is paid, the homeowner can then use those savings to invest wisely. Alternatively, instead of waiting to pay off a loan, homeowners can invest money that would go toward a portion of their loan into the stock market. This can be risky to do while still paying off a loan because there are no guarantees on returns with the stock market.

Potential Disadvantages with Accessibility

Investing elsewhere instead of prepaying a home mortgage can be more convenient because the funds will be more accessible. Money tied up in home equity is locked up and unavailable in an emergency, but accessing money invested in the stock market, for example, would be easier. Whether investing or putting money toward the equity of a home, keeping a separate savings account can help in case of an emergency.

Checking Terms

Most lenders do not penalize homeowners for prepaying, but it's wise to read the small print before deciding to prepay a mortgage. Common terms stipulate not paying off more than 20 percent of a loan balance in a year. A borrower that exceeds this amount might receive a penalty fee equal to 80 percent of six months of interest.

Amount to Prepay

Determining the amount to pay depends on how much is affordable and how much interest a homeowner wishes to save. Prepayment calculators can assist with determining prepayment costs. Even increasing a home mortgage payment by $100 each month can have a significant impact on the duration of the loan and the interest paid over the life of the financing.

Some experts advise to pay off early, while others caution consumers also to pay attention to retirement savings and to add to this balance as well. Before proceeding, consult a financing expert to make an informed decision.

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