Ready To Refinance Your Mortgage
If you want to refinance to a mortgage you can pay off fast, talk to our friends at Churchill Mortgage. The home loan specialists at Churchill Mortgage show you the true costand savingsof each loan option. They coach you to make the best decision based on your budget and goals.
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Renewing Your Mortgage Vs Refinancing
Renewing your mortgage is the easiest route, but you might not get the most competitive interest rate. On the other hand, refinancing your mortgage is more work but ensures you have access to the lowest possible interest rates. Hereâs a quick comparison.
Outstanding balance carries forward into the new term
Option to refinance for a higher mortgage balance
Mistake #: Not Asking If Theres A Prepayment Penalty
Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, youre essentially costing the lender money. Thats why some lenders try to make up for lost profits by charging a prepayment penalty.
Prepayment penalties can be equal to a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If youre paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500.
In the process of trying to save money by paying off your mortgage early, you could actually lose money if you have to pay a hefty penalty.
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One Extra Payment A Year
Making one additional payment per year offers the same benefits as making biweekly payments. You not only pay down your mortgage principal faster, you save thousands of dollars in the long run. There are several ways to swing one extra payment each year:
- Use your tax refund or bonus.
- Put a little aside each month and make one extra payment in December.
- Take on a side hustle you enjoy, and dedicate your earnings to an extra mortgage payment.
Paying Off Your Mortgage Early: Overview
When you first begin paying off your mortgage, most of your payment goes towards the interest. Very little actually goes towards the loan principal the actual money you borrowed. As the principal slowly shrinks, you accrue less and less interest from month to month. Towards the end of your mortgage term, much more of your monthly payment can go towards the principal.
If you want to pay less over time, you want to pay down more of the principal early on. This will reduce future interest payments, and more of your future payments will be able to go towards the principal. Pay off enough of the principal before its due, and you can cut years off your mortgage term, saving thousands of dollars in payments.
For example, lets say you take out a $200,000 mortgage with a 5% interest rate and a 30-year term. Your monthly payment will be $1,073.64, not including mortgage insurance and other fees. Not bad, right? But when you calculate the total cost, you end up paying $386,511.57 over the course of the loan. Thats $186,511.57 in interest!
Now, imagine you have the same loan, but you pay an extra $100 per month towards the principal. Your total interest payments would drop to $149,442.54, a savings of $37,069.03. Meanwhile, youd pay off the loan in 24 years and 10 months instead of 30 years.
So, why doesnt everyone do this?
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Mistake #: Not Considering All Of Your Options
It can be very tempting if you come into some extra money to put that toward paying your mortgage off ahead of time. However, getting out of debt a little bit earlier may not be the most remunerative choice to make. To illustrate this, lets look at an example.
Lets say youre considering making a one-time payment of $20,000 toward your mortgage principal. Your original loan amount was $200,000, youre 20 years into a 30-year term, and your interest rate is 4%. Paying down $20,000 of the principal in one go could save you roughly $8,300 in interest and allow you to pay it off completely 2.5 years sooner.
That sounds great, but consider an alternative. If you invested that money in an index fund that represents the S& P 500, which averages a rate of return on 9.8%, you could earn $30,900 in interest over those same 10 years. Even a more conservative projection of your rate of return, say 4%, would net you $12,500 in interest.
Everyones financial situation is unique, and its very possible that the notion of being out of debt is so important to you that its worth a less than optimal use of your money. The important thing is to consider all of your options before concluding that paying off your mortgage earlier is the best path for you.
Make One Extra Mortgage Payment Per Year
Many homeowners choose to make one extra payment per year to pay off their mortgage faster.
One of the easiest ways to make an extra payment each year is to pay half your mortgage payment every other week instead of paying the full amount once a month. This is known as biweekly payments.
When you make biweekly instead of monthly payments, you end up adding one extra payment each year.
However, you cant simply start making a payment every two weeks. Your loan servicer could be confused about getting irregular, partial payments. Talk to your loan servicer first to arrange this plan.
You could also simply make a 13th payment at the end of the year. But this method requires coming up with a lump sum of cash. Some homeowners like to time their extra payment with their tax return or with a yearly bonus at work.
However you arrange it, making an extra payment each year is a great way to pay off a mortgage early.
As an example, if you took out a mortgage for $200,000 on a 30year term at 4.5%, your principal and interest payment would be about $1,000 per month.
Paying one extra payment of $1,000 per year would shave 4½ years off your 30year term. That saves you over $28,500 in interest if you see the loan through to the end.
Paying down your mortgage balance quickly has other advantages, too.
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Make Extra Mortgage Payments
Another way you may be able to save money on interest, while reducing the term of your loan is to make extra mortgage payments. If your lender doesnt charge a penalty for paying off your mortgage early, consider the following early mortgage payoff strategies.
Just remember to inform your lender that your extra payments should be applied to principal, not interest. Otherwise, your lender might apply the payments toward future scheduled monthly payments, which wont save you any money.
Also, try to prepay in the beginning of the loan when interest is the highest. You may not realize it, but the majority of your monthly payment for the first few years goes toward interest, not principal. And interest is compounded, which means that each months interest is determined by the total amount owed .
What Does It Cost To Pay Out Your Mortgage
The terms of your mortgage agreement will determine if you have to pay a prepayment charge and if so, how it’s calculated:
- If you have an open mortgage:Whether you have a fixed or variable interest rate, you can pay off your entire open mortgage without paying a prepayment charge.
- If you have a variable interest rate and a closed mortgage:You will typically be required to pay three months of interest. Check with a Mortgage Specialist for exact details on the cost.
- If you have a fixed interest rate and a closed mortgage:This one is a bit more complicated. Your prepayment charge will be the greater of:
- Three months’ worth of interest or
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If You Decide To Pay Your Mortgage Off Before You Retire
Ideally, you would accomplish your goal through regular payments. However, if you need to use a lump sum to pay off your mortgage, try to tap taxable accounts first instead of retirement savings. If you withdraw money from a 401 or an individual retirement account before 59½, youll likely pay ordinary income taxplus a penaltysubstantially offsetting any savings on your mortgage interest, Rob says.
Why Do Lenders Charge A Mortgage Prepayment Penalty
Lenders primarily make their money through charging interest, and an early payoff of a mortgage means losing out on tens of thousands of dollars of interest over the years. The beginning of the loan term proposes more financial danger to lenders because they havent had the chance to receive enough payments for the loan to be profitable.
An early sale or refinance of a house is a loss of opportunity for the lender. Since the lender recently sunk resources into providing the mortgage, theyre looking for a return on their investment for years to come, not the loan balance they just lent.
During the closing process, lenders disclose crucial information to the borrower, including the prepayment penalty. So, if you are currently shopping for a mortgage, note the different rates and fees among lenders to pick what suits you best.
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Pros Of Paying Off Your Mortgage Early
There are obvious pros to paying off mortgage loans early. For starters, you don’t have to make any more monthly payments, and you’ll have peace of mind knowing your home is your own. By eliminating that monthly payment you will have more disposable cash on hand each month. There would be no need to squirrel away mortgage money or worry whether you made the payment on time. The extra cash can more easily go toward other things like hobbies, traveling, investing, or saving. It also gives you the freedom to start investing, saving money for home improvements, boosting your savings accounts, or more. In short, you’re no longer tied to your home loan.
Looking forward to finishing up monthly mortgage payments once and for all? Credible can also help you determine if you’re ready to refinance your mortgage.
Aside from the obvious, there are some other pros of an early mortgage payoff, including:
- Improving your creditworthiness
Improving creditworthiness: While experts agree that closing your mortgage has little effect on your actual credit score, a mortgage that is paid in full will be reflected on your credit report for 10 years. By eliminating your mortgage and having it show as a closed account in good standing, you will be more attractive to lenders and it also lowers your debt to income ratio. Ryan Dibble, COO of Flyhomes, told Fox an early mortgage payoff also lowers the risk of your home being foreclosed on.
Should I Leave 1 On My Mortgage
Historically, leaving a small amount of money outstanding on a mortgage meant that the lender kept the deeds for the property in safe keeping but nowadays, deeds for the majority of properties are no longer required in paper format records are now held electronically by the Land Registry.
On top of this, leaving a nominal amount on a mortgage in the past made it easier to borrow from an existing lender. However the impact of the recession and the tightening of affordability criteria means that any new line of credit will require a separate application with new credit checks, regardless of the lender.
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Final Steps To Paying Off Your Mortgage Early
Once you’ve made your final mortgage payment, you’ll have to finalize everything so you can put the loan behind you and enjoy your fully paid-off home.
Find the Best Refinance Rates with the CNET Rate Alert
- Request your mortgage payoff statement: Your job isn’t done after you make your final mortgage payment, as you’ll have to request your mortgage payoff statement from your lender. This document shows that you no longer owe anything on your mortgage.
- Inform your city of ownership status: Either you or your lender will have to inform the city or municipality where your home is located that you are the official owner of the property. In many cases, you can do this online or request your lender do it for you. Remember, most mortgages pay your property taxes on your behalf from your escrow balance — once your mortgage is paid off, that becomes your job.
- Inform your insurance company: Now that your home is in your name, you’ll also be responsible for paying your insurance provider directly. Inform your insurance provider that you own the home and will be making payments going forward.
- Inquire about escrow funds: When you’re paying off your mortgage, your lender may keep funds for homeowners insurance and property taxes in an escrow account for you. Once you’ve paid off your mortgage, you can ask your lender to transfer any remaining escrow balance back to you.
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Reduce The Amount Of Debt You Have
Mortgage debt is a significant undertaking, especially if you have additional debt from student loans, credit cards, etc. By paying off your mortgage early, youll reduce a substantial portion of your debt and free up more funds to make your other monthly payments. The faster you pay off all your debts, the sooner youll achieve financial freedom.
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You Can Put Your Money In Less Risky Investments
Once you pay off your mortgage, you can use the money you were paying towards your mortgage to invest in safe investments.
Thats not to say that your home is a risky investment, because its not. However, there is always the possibility that housing prices could drop, and your home could wind up being worth less than you were expected or fail to keep up with inflation. This rarely happens, but theoretically speaking, it could.
However, it is unlikely that these investments would deliver a higher return than your mortgage interest rate. That is why they are not as desirable for those who have mortgages.
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What Happens When You Pay Off Your Mortgage Early
Whether your mortgage is paid off early or on time, the procedure is the same. To begin with, your lender will mail you a cancelled copy of the promissory note you signed when you took out the mortgage. This canceled document serves as proof that youve paid off your debt. Most lenders will also send something called a certificate of satisfaction, but thats not required.
At this point, you own your house free and clear. But to sell or transfer your homes title, youll need to make sure the lien is removed. Most lenders will do this for you, and your county or city recorder will send you a clean copy of your title in around six to eight weeks. However, some lenders will not provide this service. In this case, youll have to call your local recorders office and ask them how to have the lien removed. This is typically very easy, and youll get a clean title in a few weeks.
To avoid any confusion, its wise to find out in advance how your lender handles the lien cancellation. A few months before your mortgage is fully paid, call them up and find out what youre going to need to do.
Youll need to contact your local tax assessors office to find out how to make your property taxes, since these have been handled as part of your mortgage. Along the same lines, youll need to find out how to pay your homeowners insurance. When you do this, make sure to have your lender removed from your policy. Otherwise, the lender could receive some or all of the payment if you file a claim.
How To Pay Off Your Mortgage Early
If paying off your mortgage early is right for you, here are some strategies to do it:
- Make biweekly payments. One way to get started with making extra mortgage payments is to set up a biweekly schedule. This amounts to making a full extra monthly payment each year and can reduce the time spent with a mortgage. Starting with biweekly payments can help you get ahead on your mortgage while allowing you to keep working toward other financial goals.
- Make extra mortgage payments each year. Similar to making biweekly payments, you can simply make an extra mortgage payment once a year, or pay an additional amount each month on top of what you already pay. Be sure to coordinate with your lender so that these extra funds are allocated to the principal.
- Refinance to a mortgage with a shorter term. If you stand to get a lower interest rate, refinancing to a 15-year mortgage means youll pay off the loan sooner. Keep in mind that even with a lower rate, you could be paying more each month, since your payments are now spread out over a shorter period of time.
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