Why Paying Off Your Mortgage Early Makes Perfect Cents
The dilemma of whether to pay off the mortgage early or not is something we all have at some point in our life. But when you put things in perspective, it’s not as tough as it sounds. You certainly enjoy a lot of benefits in paying off your mortgage early. Given here are the reasons why you should go ahead and make the decision.
The interest rate
This is easily the most obvious benefit of all. If you look at your amortization schedule, a large portion of the amount you pay in the first few years would go to the interest. For example, if you had a loan of $100,000 and paid $600 every month, more than $400 would go only for the interest in the first few years. In other words, a loan which could be finished off in just under 14 years is stretched up to 30 years, with tens of thousands going to the interest alone. Prepaying your mortgage allows you to save this amount and cut down your loss.
Makes you feel secure
Let’s face it; 30 years is a long period to be in debt. When you prepay your mortgage, you feel relieved as you are debt free. This gives you more control over your life, as you can plan your income the way you want. The odd feeling of owing money goes off, and it makes you feel secure as you have a debt free asset that you can bank on.
Paying off your mortgage early helps you plan your post-retirement life by investing in plans that offer steady returns. It also helps you meet your living expenses. Moreover, a debt-free property is what you would like to leave behind for your heirs.
Cuts down the costs
In most of the middle-class homes, paying monthly mortgage payment is a huge liability. Once it’s paid off, your cost of living could be brought down which helps you go easy on your otherwise stringent monthly budget.
Improves your credit ratings
Prepaying your mortgage will have a great impact on your credit ratings and they tend to improve. Most importantly, it helps you get future loans with lower Annual Percentage Rates (APR), which reduces the chances of you paying more than the actual amount of the loan while repaying it.
Things to look out for
- Most people retain their mortgage due to the tax benefits they get. However, those who are subject to minimum taxation will not get the full benefits. So, check your status thoroughly before taking a decision.
- A lot of financial institutions have penalties for prepaying the mortgage. It’s always better to avoid such schemes which might prevent you from paying off your mortgage whenever you want.
Avoiding home foreclosure – Practical suggestions to avoid foreclosure
Home foreclosure, once considered a rarity, has become commonplace nowadays. As the Mortgage Brokerage Association statistics point out, the number of home foreclosures has risen sharply from 200,000 to over 600,000 in just under two decades. And my mortgage broker in Adelaide told me things are just getting worse rather than better.
While missing your loan payments could be the most obvious reason for a foreclosure, there are a lot of other reasons which play a big role in this process. Divorce, medical expenses due to sudden health related problems, credit card debt, job loss, and death of the only breadwinner of the family are some of the major reasons for home foreclosures.
Having said all this, you cannot rule out the fact that home foreclosures can be avoided. With a little bit of calculation and caution, home foreclosure could be completely taken out of the equation. Given here are some of the dos and don’ts about avoiding home foreclosures.
Make your payments regularly
This is possibly the easiest way to avoid a foreclosure. Preplan your expenses accordingly and make sure you don’t miss a single payment. Even when you miss a couple of payments, your credit undergoes a major setback, which might be a big issue in your loans.
Disclose to your lender
Most people don’t reveal their problems to their lenders and treat their letters as threatening calls. When in trouble, discuss with your lenders and explain the reason for not making the payments. Banks and mortgage lenders always want their money back, not your home. You can also get help from professional foreclosure negotiators who are trained to talk the talk with the lenders and sort out the problems.
Prioritize your obligations
Say you have missed out a few months’ payment and your mortgage company insists you to make the due payment in a single installment. The commonest mistake people do is to pay off credit cards, phone, and other regular obligations and then with what little they have, try and negotiate with the mortgage company. It simply doesn’t work that way. When you have reached the point where your company asks for a bulk payment, make it without a second thought. Remember – mortgage payment should be your first priority as your most valuable property is at stake.
Seek help from your near and dear ones
While it may be embarrassing for you to admit your crunch and ask your friends and relatives for help, it is much better than moving out of your home and the news hitting the papers. The support from friends and relatives not only helps you financially, but also serves as a big morale booster.
Lookout for the options
When it comes to foreclosures, as they say, “It ain’t over until it’s over.” Most people succumb to the pressure of the mortgage companies and think they have no other options. But, there are options available to help you out. You can opt for a special forbearance in which your lender will reduce or defer some of your payments. You can also modify your mortgage and ask your lender for an extension of the loan period. When talked about, most of the lenders would come up with such options to get you back on track.
Reverse mortgage – What everyone should know before going in for reverse mortgage
A reverse mortgage is the credit taken against your home equity, which you need not repay as long as you to continue to live there. The credit has to be paid back only when you die, sell your home, or move out of your home permanently. Reverse mortgage is ideal for old people who are in need of cash, as it helps them meet their needs while retaining the ownership of their home. Reverse mortgages are applicable only for senior citizens that are 62 or older and live in their home.
How does it differ?
In a normal loan, you get credit against your home, which you repay through regular installments. As you continue to repay the amount with interest, the equity on your home increases and at the end of the loan period, it would have increased considerably.
In case of reverse mortgages, you get credit against your home and don’t repay it. The equity on your home decreases with every payment you get from your lender. In other words, the higher your debts, the lower will be your home’s equity.
There are three types of reverse mortgages available – single purpose reverse mortgages, federally insured reverse mortgages or HECMs, and proprietary reverse mortgages.
Single purpose reverse mortgages are the cheapest of their kind and meant for home owners who fall in the low-income group. They are not easily available and funded only by few non-profit organizations and local government organizations. Single purpose mortgages are limited to specific purposes stipulated by the government such as home repair, improvement, and property tax payments.
Federally insured reverse mortgages, also called Home Equity Conversion Mortgages (HECM), are not limited for few purposes and also readily available. Federally insured mortgages have high fees and require you to do some groundwork. You have to meet a government housing counselor who will explain whether you qualify for the loan or not and the intricacies involved. This mortgage is federally insured and supported by the HUD, which serves as a big advantage.
Proprietary reverse mortgages are funded by private companies. Though the costs involved with this type are high, you also stand to get a bigger credit if you have a high priced home. They can be used for any purpose and have no medical or income constraints.
Flexible payment options
The credit you get from reverse mortgages can be paid
- As a lump sum
- As equated monthly installments for a fixed number of months
- As equated monthly installments till the full amount is settled
- As credit line payments, in which you determine the amount to be paid whenever you need it, till you reach zero balance in the credit offered
- As a combination of the aforementioned plans
Things to look out for
- Get to know about the type of mortgage thoroughly through authorized sources. For example, you cannot use the credit from single purpose mortgage for any other purposes apart from the stipulated ones and you cannot get proprietary mortgage if you have a low-priced home. Area Agencies on Ageing (AAA) should be able to give you relevant information about these things.
- Usually the credit you get from mortgage is not taxable and hence your Social Security and Medicare status will remain the same. However, in single purpose mortgage, if there is some amount left in your account after your expenditures, it will be considered an income and may affect your Medicaid status.
- You can opt for fixed or variable interest rates on your reverse mortgage.
- Maintaining your home, paying property taxes, and insurance are your sole responsibility.
- Check out for the non-recourse clause to make sure at the end of the mortgage you don’t owe more than your home’s value.
- In case of a violation of the law, you can report to your state attorney general, state banking regulatory agency, and the Federal Trade Commission (FTC).
Points and their effect on your mortgage
Mortgage points and origination fee have always been the most discussed topics in the market. Yet, there has always been a sense of ambiguity among people about points and their effects in mortgage. This article aims to throw some light on the topic and provide you with some useful suggestions.
Origination fee and points
Origination fee and point are both charged as a small percentage of your loan amount. Origination fee is charged to start your mortgage, and is usually 1% of the entire loan amount. A point is an amount that is equivalent to 1% of your entire loan amount. After you pay the origination fee, which is a must to get started with your mortgage, any other percentage of your loan amount is calculated as a point.
What are they meant for?
Points are usually meant for lowering the interest rate of your mortgage. They are nothing but prepaid interest on your credit. They are also called discount points, as they provide the customer with a discount in the interest. Technically speaking, you pay a little more in the beginning to lower the interest rate throughout your loan period.
How do they work?
Points can be effective only for long term loans. To understand this clearly, you need to do a little math. For a loan amount of $100,000 at an interest rate of 6%, the monthly payment would be $600. Now when you buy a point worth 1% of the loan amount, which is $1000, the interest rate is brought down to 5.75%, which means you pay only around $584 per month. You stand to save around $16 every month, $192 every year.
Are they meant for everyone?
If you think buying points would be profitable for everyone as it brings down the interest rate, here’s the catch. Again, you can do a little math to understand this. According toe the example above, for a point of $1000, you save $192 every year. Now, at the rate of $192 every year, it will take you around five years to break even. If your loan period is less than five years, the point is of absolutely no use as you can’t make up for the amount you paid initially.
Who can buy points?
Buying points is a wise option when you have a long term mortgage plan. When you have a mortgage period of say 15 years, you save $2880 at the end, making up for the $1000 you paid and clearing up $1880. As a thumb rule, the longer your loan period, the more advisable it is to buy points.
Things to look out for
- Buying points is best when you take high risk loans. These loans usually have the highest interest rates in the market and it makes more sense to buy points and bring the interest to a manageable level.
- If your mortgage is meant for buying or refurbishing your home, the points are completely deductible in the current year, which works at your advantage.
- In case of refinancing your home, your points will get deducted over the entire period of your loan. For example, points bought worth $2000 for a 20-year period would be deducted at $200 per year.
So should you pay off your mortgage early if it is at all possible, if I still had a long term mortgage, I certainly would. But hopefully with all of the information I have provided above, you can now make an informed decision based on your individual financial needs.