For many people, getting a mortgage is a step towards owning their dream home. However, paying off that mortgage as soon as possible is also a common goal for most borrowers. With prepayment privileges, borrowers can increase their monthly payments and make lump sum payments without facing any penalties. Prepayment privileges differ among lenders, which is why borrowers need to understand the details of their lenders’ policies.
Prepayment privileges are designed to help you pay off your mortgage faster. They allow you to make additional payments towards your mortgage over and above your scheduled payments. When you make extra payments, 100% of that payment goes toward the principal, thereby reducing your interest portion. Understanding prepayment privileges is important because it helps determine the most effective strategy for paying off your mortgage early.
Prepayment privileges are typically written in the form of two numbers. The first number represents the percentage by which you can increase your payments annually, and the second number represents the percentage of the lump sum payment you can make each year. For instance, if your mortgage has 20/20 prepayment privileges, you can increase your monthly payment by 20% each year and make lump sum payments equal to 20% of your mortgage balance each year.
When you have 20/20 prepayment privileges, you can increase your monthly payment by 20% per year, which means that if you had a monthly mortgage payment of $2,000, you can increase this to $2,400 right from the first payment. However, it’s important to note that some lenders might calculate the payment increase privilege based on the original payment amount, while others might add the percentage increase on top of the new payment amount each year.
You can also stack your payment increase privilege, which means that you can increase your payment by the maximum allowed percentage every year. In this example, the payments would look like this over the course of a 5-year term: $2,400 in the first year, $2,600 in the second year, $3,000 in the third year, $3,400 in the fourth year, and $3,800 in the fifth year. It’s important to note that while stacking your payment increase privilege is a great way to pay off your mortgage faster, it might not be sustainable in the long term. Therefore, you need to find a strategy that works for your financial situation and goals.
Understanding prepayment privileges is critical when selecting a lender. Some lenders might have higher prepayment privileges than others, and some might even have prepayment penalties if you exceed their limits. Additionally, you should also consider whether you want to have an open or closed mortgage. With an open mortgage, you have more flexibility to make additional payments, but you will likely face a higher interest rate. In contrast, a closed mortgage has more restrictions on prepayment, but it comes with a lower interest rate.
Ready to take control of your mortgage payments? If you’re interested in learning more about prepayment privileges, we’ve got you covered. Don’t miss out on the opportunity to save money and pay off your mortgage faster!
We invite you to consult a knowledgeable mortgage specialist today. With their expert guidance, you can make informed decisions and tailor your mortgage plan to suit your unique financial situation. Don’t wait – start unlocking the benefits of prepayment privileges now!