Whether you have plans to apply for a new mortgage or to pay off your current mortgage early, it is imperative that you take a closer look at your prepayment options. In most mortgage contracts, there are special clauses that discuss the circumstances within which you can prepay your loan early, and there are often special rules that must be followed when doing so. In addition, some mortgage contracts require you to pay a prepayment penalty fee or to deal with other consequences of early repayment. These fees can be significant, so homeowners and mortgage applicants alike should take time to research the penalties in greater detail.
What is a Prepayment Option?
A mortgage contract is a legally binding contract, and you are obligated to follow the rules outlined in the contract specifically. If you fail to do so, you could be in breach of your contract and face various penalties. A prepayment option, however, enables you to repay your loan before the term of the loan has been reached. It is important to note that a mortgage loan may be considered to be prepaid even when it has not been prepaid in full. For example, some mortgage contracts will indicate that prepayment relates to any amount that has been paid beyond the amount of the minimum monthly payment. Paying even a few dollars more per month or making payments too soon may trigger the prepayment clause in the mortgage contract.
Different Prepayment Options
Because the prepayment options for a mortgage contract can vary significantly from one lender to the next, it is important that you review and understand your prepayment options in detail before you sign your loan documents. While some people will apply for a new mortgage with the intention of remaining in the home until the end of the mortgage term has been expired, others may have plans to repay the loan in full before the end of the term or to refinance the loan to obtain cash out. Others may have plans to move to a new home within a few years. There are different prepayment options available, so it is important to review the prepayment terms in detail before you apply for a loan. This will help you to ensure that your loan most closely meets your needs and objectives.
One of the most popular prepayment options includes accelerated payments. Making accelerated payments can allow borrowers to pay the principal balance of the loan, while paying less interest over time. Borrowers can accomplish this by increasing their payment frequency. Payments can be made on a semi-monthly, bi-weekly, or weekly scale. While accelerated payments can help to reduce the overall amortization costs, it does require making payments-sometimes higher payments-more often. As such, homebuyers who are considering employing this prepayment method should monitor their budget carefully.
Learning More about Your Current Mortgage Prepayment Options
If you already have an existing mortgage in place and are considering prepaying the loan in part or in full, you can learn more about your current prepayment options in any number of ways. One good option to consider is to read through the original mortgage documents that were signed. You can also contact the mortgage company's customer service directly to obtain more information. However, if you have plans to prepay the loan in full, it is wise to get a copy of the prepayment options in writing before proceeding.
What to Consider
When you are thinking about taking advantage of prepayment options available to you, consider what factors will trigger the prepayment clause from going into effect. Does the loan need to be paid in full, or will a certain dollar amount of prepayment trigger the prepayment clause? In addition, you can research the prepayment fees and charges that may be assessed. In some cases, this is a flat fee, but in many cases, a percentage-based fee is applied. Some lenders will allow you to prepay a loan early without a fee if you are refinancing your mortgage with them. In some cases, the calculation of the prepayment penalty will be rather complex. If this is the case, you should contact your lender's customer service department to obtain an estimate of the fee that you may be responsible for. This should be done before you actually make a prepayment, and this will ensure that you are not caught off-guard with a huge prepayment penalty fee.
Understanding how the prepayment clause affects your plans is imperative. In some cases, the prepayment options available to you through a mortgage contract will be straightforward and easy to understand. However, in other cases, the options are complicated and confusing, and you may need to talk to your lender for clarification and to ensure your understanding.
Interested in learning more about mortgages?
- Read: Mortgage Default Insurance
- Read: Mortgage Downpayments
- Read: Variable vs. Fixed Mortgage Rates
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