How to Pay Off Your Mortgage Faster
April 3, 2019 | Posted by: Sherry Corbitt
Paying off a mortgage early is not easy. On one hand, you could save yourself a lot of money on interest, and on the other, you could incur penalty charges for breaking your mortgage contract before the maturity of the term.
Before you even pay off your mortgage, you need to know about your prepayment privileges. On your mortgage contract, it will list any prepayment privileges and the amount you may pre-pay without incurring a penalty.
But what causes prepayment penalties? Prepayment penalties are incurred when:
- the borrower pays more toward the principal than what is allowed as per the mortgage contract.
- the borrower pays off the entire mortgage balance before the end of the mortgage term.
- the borrower refinances and increases the amount they are borrowing on before the maturity date, breaking their term.
- the borrower transfers their mortgage to another financial institution before the maturity date.
- the borrower renews their mortgage early and breaks the term before the maturity date.
Most lenders will allow a person to prepay up to a certain percentage of the loan balance each year, but if you pay more than that or you break your term before your maturity then penalties will be charged. This is because when you prepay your mortgage, the lender is entitled to recoup the interest that they would be losing. Prepayment penalties usually vary from lender to lender.
Usually, the prepayment penalty will be the higher of:
- an amount equal to 3 months’ interest on what you still owe
- the interest rate differential (the difference between the interest rate on your current mortgage term and today’s interest rate for a term that is the same length as the remaining time left on your current term).
So how can you pay off your mortgage early and avoid a penalty? You could:
- increase the amount or frequency (monthly to weekly or bi-weekly) of your payments.
- make lump sum payments. Just make sure that you are well in the range of the percentage you’re allowed to prepay that is listed on your mortgage contract.
- port your mortgage. This means that if you are moving, you can take your current mortgage interest rate and term with you to your new home and avoid paying a penalty.
- blend your mortgage. If you are refinancing and increasing your mortgage, you may be able to keep your current rate on your current balance and blend it with the new rate for the increased amount.
- look into seeing if the buyer of your home (if you are moving) is able to assume and accept liability for your existing mortgage.
Knowing your prepayment privileges could save you a lot of money in the long run. Just make sure that when you pay it off early, that you do it correctly so that you aren’t charge penalties. It may take you a bit longer, but it will be worth it.