It might seem like a good idea to pay off your mortgage earlier than expected if you’re looking to save money on paying interest. Depending on the size of your home loan, you can possibly save hundreds to thousands of dollars in interest. If you’re leaning towards this approach, consider the following to avoid costly mistakes.
Put Additional Monthly Payments Towards Your Principal Balance
Making additional monthly payments doesn’t necessarily mean that you’ll pay off your mortgage early, not unless you tell your lender that your additional payments are specifically for your principal. Your lender might put it towards the interest for your next monthly payment if you do so, an experienced mortgage lender in Utah explains.
Ask Your Lender About Prepayment Penalties
The business of mortgage lenders such as Altius Mortgage Group is to make money and they mainly do this through the interest charges on loans. This means that if you prepay your home loan, you are basically taking away their chance of earning money from the interest. This is also the reason mortgage lenders charge prepayment penalties to try and make up for the profits they lose when borrowers prepay. So if you’re looking to save some cash by prepaying your home loan, you might lose more money through costly penalties.
For instance, if your lender’s prepayment penalty is 3% and if your mortgage costs $300,000, you will need to pay an additional $9,000 prepayment fine. So ask your lender first.
Think Twice About Refinancing
While refinancing your mortgage can save you some money on interest, depending on your specific circumstances, you might actually have to spend more in the long run, most especially if you are looking to lengthen your mortgage term. Prior to refinancing, try to determine if lengthening your term might be more practical. Do not forget to factor in closing costs, because if your mortgage lender allows you to roll over the closing costs into your mortgage, you would be spending more money since you’d be paying more interest on a higher mortgage amount.
Whether you should prepay your home loan significantly depends on how much cash you could spare. If you make extra monthly payments for your principal balance, you can potentially drain your savings. So think long and hard before making your move.