When it comes to mortgages, many homeowners strive to pay off their loan as quickly as possible. And it’s not uncommon to think that selecting a shorter amortization period, say 25 years instead of 30, will be the key to achieving this goal. But what if we told you that the initial amortization period you choose is actually irrelevant if you have two important things in place?
The first thing you need to have in place is prepayment privileges. Most lenders offer prepayment privileges which allow you to make additional payments towards your mortgage beyond your regular payments. These extra payments can take the form of increased regular payments or lump sum payments. When reviewing prepayment privileges, lenders will express them as a percentage, such as 100/15 or 20/20. The first number indicates the percentage in which you are allowed to increase your scheduled payments, while the second number refers to your lump sum payments. So, if you have a 20/20 prepayment privilege, you are allowed to increase your payments by up to 20% and make lump sum payments of up to 20% of your original mortgage balance each year.
Now, this is where the magic happens. As soon as you make an additional payment, regardless of whether it’s a lump sum or an increased payment, your effective amortization immediately drops. This is where the second thing comes in – a plan to take full advantage of prepayment privileges to make additional payments to your mortgage.
When it comes to prepayment privileges, it’s important to be mindful of the two things you need to watch out for. The first is lower maximum prepayment limits. For example, a lender may only offer a prepayment privilege of 5/5 or 10/10, which is a bit restrictive for those who want to aggressively pay down their mortgage. However, even with lower prepayment limits, you can still work to meet your prepayment goals and move closer to your goal of becoming mortgage-free.
The second thing to watch out for is lump sum prepayment flexibility. Some lenders may limit you to making only a single lump sum payment per year. Once you’ve made a prepayment, you cannot make another until the following year, whether it’s based on the calendar year or your mortgage anniversary year. It’s best to avoid lenders that offer these types of prepayment privileges if you want the freedom to make additional lump sum payments throughout the year.
Ultimately, it’s your prepayment privileges that will allow you to pay down your mortgage as quickly as possible. The initial amortization period you choose becomes irrelevant once you have prepayment privileges in place and a plan to use them to your advantage.
Are you looking for ways to pay off your mortgage faster? Mortgage specialists have helped many clients pay off their mortgages in a shorter amount of time than they thought possible. They can offer you expert advice and strategies to help you achieve your financial goals and reach that much-desired freedom.
If you’re ready to start the journey to a quicker mortgage payoff, don’t wait any longer! Make an appointment with a local mortgage specialist. You won’t regret taking that first step toward financial freedom. Take control of your financial future and pay off your mortgage sooner than you ever thought possible.