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.
Benefits Of Paying Off Your Mortgage Early
Owning a home without a mortgage is financially liberating. Here are just a few of the key benefits:
- You save money. By paying off your mortgage you eliminate interest costs. This lowers your monthly expenses and reduces the total cost to own your home.
- No interest is better than a mortgage tax deduction. If you keep the mortgage to get the tax deduction then you’re paying $1 to the bank to get a $0.25 tax deduction . You’re still out $0.75. If you pay off the mortgage, you pay $0.25 in taxes and have $0.75 in your pocket.
- You will gain the flexibility of using what had been the mortgage payment to invest in retirement or save toward other financial goals. Imagine! Not only will you avoid paying mortgage interest, but you’ll be making money in higher-yielding accounts!
How To Pay Off Your Mortgage: Step
While the process of paying off your mortgage typically takes decades, crossing the finish line requires a few extra steps. Lets review the steps it takes to pay off your mortgage:
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What Happens When You Pay Off Your Mortgage
See Mortgage Rate Quotes for Your Home
Paying off your mortgage is a momentous event, and one that should be celebrated. However, before popping open the bubbly, its important to know what happens when you pay off your mortgage to avoid any unpleasant surprises. This includes obtaining the proper payoff documents, closing out your escrow account, and making sure you redirect your tax and homeowners insurance bills so you dont miss a payment.
Your Land Title Registry Offices Role
Land title registry offices are part of your provincial or territorial government. These offices register official property titles. They have processes to make changes to a propertys title.
You, your lawyer or your notary must provide your land registry office with all the required documents. Once it receives the documents, your land registry office removes the lenders rights to your property. They update the title of your property to reflect this change.
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How Long Does It Take The Average Australian To Pay Off Their Mortgage
It turns out this is a pretty wide and varying question to answer as depending on your circumstances it might take you 5 years or 50. You might have 8 children or none. You might have 2 children and be a single mother or father. You might decide never to have children or you might just live on your own for the entire time you have a mortgage. Given I cant cover EVERY persons unique circumstances Im today going to focus on just two of what I think are the major ones. A couple without children and a couple with children .
Searching through the trusty Australian Bureau of Statistics website I came across these statistics taken from May 2012, granted not the most up to date figures but I somehow doubt Australians habits have changed greatly since two years ago so they will do. Ive taken the figures in their table 10.22 and put them into a more readable and nice format for each of the two main cases.
Age vs Mortgage Rates Couples
Age vs Mortgage Rates Familys
Unfortunately as the graphs show, this tendency to take 30+ years to fully pay off a home loan means that virtually all Australians are paying huge amounts of interest every year. Now although a household might pay off their mortgage and then upgrade their house to a bigger one with a new mortgage doesnt mean that theyre not at any point paying interest. Whilst its clear that most people see a mortgage as something that youll be paying off for the rest of your life it really doesnt have to be this way.
Why Pay Off Your Mortgage Early
Few people keep a 30year loan for its full term. In fact, homeowners stay put just 13 years on average and their loans might have an even shorter lifespan if they refinance at some point.
Homeowners who plan to sell their home or refinance soon usually arent concerned about paying off their mortgage early.
But what about homeowners who stay put for the long haul? Those 30 years of interest payments can start to feel like a burden, especially compared to the payments on todays lowerinterestrate loans.
You may find yourself wondering how to pay your mortgage off faster so you can live debtfree and have full ownership of your home.
Here are five strategies you can use to meet those goals.
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Mistake #: Extending Your Loan Term When Refinancing
Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on whats best for you. So if youre 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years. On the flip side, you could go for another 30-year term to lower your monthly payments.
However, loans with shorter terms tend to have lower interest rates, allowing you to both save on interest and reach full ownership much sooner. In some cases, though, refinancing could cost you more in the long run, especially if youre planning to extend your loan term. Before you refinance, its a good idea to crunch some numbers and figure out whether having a longer mortgage term really makes sense.
Dont forget closing costs either. If your lender agrees to let you roll those costs into your loan, you could end up paying more money. After all, youll now be on the hook for interest on a larger loan amount.
Paying Off Your Mortgage Early: The Pros And Cons
The first and most obvious reason to pay off your mortgage as soon as possible is that it will save you tens of thousands of dollars. Read the papers you signed when you bought the place and take a close look at your amortization schedule. The mortgage companies disclose right up front that you will pay more than twice the purchase price of the home before you actually own it.
The second reason is the peace of mind you gain from owning your home. With the lower monthly cash outlay requirement, the prospect of unemployment or underemployment is no longer so daunting. You can now afford to take a job that pays a whole lot less than your previous position, without any concerns about losing your home.
However, many people argue that paying off your mortgage is a bad financial move. They claim that you will get a higher return, in the long run, if you invest your money, instead of making extra mortgage payments. While there is some chance that you will achieve such a feat, there’s also a chance that you won’t. Given the choice between a guaranteed savings of the 6% interest on their mortgage , or the possibility of achieving some other rate of return, which may be higher or lower, conservative investors will take the safe bet.
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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.
Should You Make One Extra Mortgage Payment A Year
Extra payments add up. A $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 payments a year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you will pay only $153,813 in interest a savings of $32,699.
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How Do I Request A Payoff Statement
Paying off your mortgage isnt complicated, but its not as simple as signing into your account and shelling out the balance. Title companies often require a payoff statement, often called a payoff letter, from the lender before transferring the deed to your name. A mortgage payoff statement is a document that shows exactly how much money is required to pay off your mortgage. Depending on the circumstances under which youve paid off your mortgage, the process can take several days.
If youre refinancing or selling your home, a third party will request the payoff. The process takes at least 48 hours when dealing with a third party because there are several steps involved so the lender can handle the payoff with the title company. For Rocket Mortgage customers, the title company calls into our phone system to request a written payoff statement.
If youre paying off your mortgage on your own, youll need to call to request a payoff letter. The lLetter will have the exact amount you need to pay through whatever date you request. At Rocket Mortgage, well fax the letter back to you, so you may be able to pay off your loan the same day if you want. Itll also be available in the Documents section of your Rocket Account.1
You can also request the document with the pay-by-phone system by calling 373-7433. We added this feature to make it easier for you to get the information you need about your payoff without speaking to a representative.
Watch For Prepayment Penalties
Regardless of which option you choose, make sure you know the terms of your current mortgage contract. Some lenders charge a prepayment penalty or exit fee for paying off your loan early.
This fee is typically a percentage of the remaining loan balance that is highest in the loans early days when youre paying the most interest and decreases every year. So the earlier you pay off the loan, the higher your penalty will be.
Consider this penalty also when you refinance, because it could be a part of your new loans closing costs.
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The Benefits Of Mortgage Repayment
You’ve taken the leap and decided to buy a home. After signing a mountain of paperwork, you are now the proud owner of your own residence. Thirty days later, when the first mortgage payment comes due, you are hit by the reality of what you have done. You have taken on 30 years’ worth of massive payments, in an economy that makes no promises about long-term job stability. Don’t panic.
In this article, we’ll look at the benefits of paying off your mortgage as soon as you can and give you pointers on how to do it.
How To Use Mortgage Pay Off Calculator
The calculator determines the number of months required to pay off your home loan by taking the total cost of the loan divided by the amount you currently pay each month.
Just enter the following details into the calculator to get an indication of how long it will take you to pay off your mortgage.
- Loan amount. This refers to how much you’ve borrowed, or plan to borrow from a lender. If you haven’t yet got a loan, work out your borrowing power.
- Interest rate. This is the fee a lender charges a borrower for the use of their money. Interest is calculated daily on the outstanding amount of the loan and you can find this rate out by looking at the product review page for the home loan you’re interested in and comparing with your own home loan statement if you already have a loan.
- Repayments. These are the payments you make towards your loan to pay if off.
- Repayment frequency. This refers to how often you’ll make repayments to pay your loan off. You can choose weekly, fortnightly or monthly instalments depending on your pay structure, loan terms and personal preference.
Results
The calculator results tell you:
- The loan term: How long to pay off your mortgage based on your current repayments.
- Total cost of loan: How much the entire loan will cost you
- Interest payable: The amount of interest you’re being charged.
Calculator assumptions
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What Documents Can You Expect
The documents you receive may depend on your loan servicer. Heres what you can expect, which documents are essential and which ones you can make do without.
If you dont have proof within about 90 days that the certificate of satisfaction has been recorded, you may need to contact your loan servicer and speak with the lien release department.
Mistake #: Leaving Yourself Cash
Throwing every extra penny youve got at your mortgage is an aggressive way to get out of debt. It could also backfire. If you dont have anything set aside for emergencies, for example, you could end up in a tight spot if you get sick and cant work for a few months. In that case, you may have to use your credit card to cover your bills or try to take out an additional loan.
If you dont have an emergency fund, your best bet may be to put some of your extra mortgage payments in a rainy day fund. Once you have three to six months worth of expenses saved, you may be able to focus on paying down your mortgage debt.
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Extra Home Mortgage Payment Calculator
You may also come into some more money that you want to put toward your mortgage. For example, you may get a great bonus from work at the end of the year or at the completion of a special project. You may win some money through a raffle or a special trip to the casino. You may come into some inheritance that you want to use to pay down your mortgage quicker. You may just get a better job in which you’re making more money, or you may eliminate some other debts or free up some money in your monthly budget that you now want to put toward your mortgage to pay it off faster.
Paying extra money on your mortgage, whether you do it each month or you do it in periodic payments such as when you get a bonus, can help you to save money over the life of the loan. You’ll reduce the overall interest you have to pay. Depending on how much extra you pay, you could save yourself thousands in interest charges over the years.
Reduce Your Balance With A Lumpsum Payment
An alternative to recasting is to make lumpsum payments to your principal when you can.
Have you inherited money, earned large bonuses or commission checks, or sold another property? You could apply these proceeds to your mortgages principal balance and be debtfree a lot sooner.
Since VA and FHA loans cannot be recast, lumpsum payments might be the next best thing. Also, youll save yourself the bank fee for recasting.
With some mortgage servicers, you must specify when extra money is to be put toward principal. Otherwise the extra money could be split between the interest and the principal as it is divided within a regular monthly mortgage payment.
Check with your servicer if you dont know how additional payments will be applied.
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