Paying off your mortgage faster is an attractive idea for pretty much… every person, ever. There are lots of ways to “get’r done” more quickly, such as increasing the amount of your regular payments, or choosing an accelerated option for your payment plan. But what are the benefits of making extra mortgage payments along the way?
An extra mortgage payment made outside of your arranged plan is actually called a “lump-sum payment,” or a “pre-payment.” Keep in mind, this extra payment is exactly that: “extra.” It doesn’t replace your regular set of installments. It’s a payment made in addition to your fixed mortgage routine. So if you hand over a lump-sum, keep in mind that this doesn’t excuse you from the customary payments you agreed to make.
However, if you make a pre-payment, the less interest you’ll pay over the long term – and the day that you’re “mortgage-free” will arrive sooner. Of course, there are some rules and regulations, because lenders need to make their money too. They can’t just give you the freedom to cut and run, when they rely on the interest you agreed pay for their income.
This is why your mortgage agreement will specify as to whether or not you can actually make pre-payments, and when you’re allowed to do so. Your agreement may also specify minimum and maximum amounts that you can pre-pay each year – Some mortgage agreements even slap you with a penalty fee for any pre-payments at all.
In fact, when it comes to lump-sum payments there are a lot of related terms and conditions nestled in the fine print of a mortgage contract. Read your agreements carefully, and ask your mortgage lender to explain anything you don’t fully understand. It’s crucial that you recognise your pre-payment options before you sign anything.
Here are some questions you can ask:
– Will there be a penalty if I pre-pay?
– When can I pre-pay?
– Are there any conditions attached to a pre-payment?
– Is there a minimum amount?
– If there are penalties, how are they calculated?
Some pre-payments will be limited to – for example, 15% of the principal you have yet to pay down. Though even within these limitations, pre-payments can make a massive difference in the amount of interest you have to pay over the course of your mortgage. And, because you’ve made that lump-sum payment and paid down your principal, the life of “old man mortgage” will lessen in years.
In the case of your mortgage, a shorter lifespan is a good thing. Lenders may not give you carte blanche to slap extra money against your principal as you please. But playing by their rules and making lump-sum payments will knock your interest down, and will let you enjoy your mortgage-free days sooner.