If you’re a homeowner with a mortgage, you’ve likely heard the term “prepayment privileges” before. Some of you may be taking advantage of prepayments, while others might not be familiar with what they are. Prepayment privileges can be one of the most beneficial aspects of your mortgage, helping you save money and pay off your mortgage faster. Here, we’re going to discuss how these payments work, and what you need to keep in mind.
How do prepayment privileges work?
First of all, what exactly are prepayment privileges, and why are they important? The goal of prepayments, of course, is to pay off your mortgage faster. While your mortgage contract outlines the regular mortgage payments you must make, prepayments are extra contributions you make toward paying off the principal amount. The more money you put towards your mortgage at a time, the sooner you can pay it off.
Why might prepayment privileges be an important option for borrowers? Most people would love to pay off their mortgage more quickly and would also enjoy saving some money as well. Prepayments allow homeowners to clear out their mortgage debt ahead of schedule and end up paying less interest in the process. After all, owning a home is a big financial commitment, so having access to these privileges can be a big relief!
How prepayment privileges can save you money
The biggest advantage of prepayment privileges and paying off your mortgage faster is the likelihood of saving your total interest charges. As you know, your mortgage comes with an interest rate, and that interest is applied to each mortgage payment. The longer you make payments, the more interest you will also contribute. If you have access to prepayment privileges, you are working away at paying off your principal balance with those extra funds. The lower your balance, the less interest you owe. This can save you thousands of dollars throughout your mortgage term.
Keep in mind…
Prepayment privileges are great, but there are certain rules you need to follow! Unfortunately, you can’t just decide on your own how much you want to increase your payments or how often to do so. Your mortgage contract will detail your prepayment privileges and penalties. It will tell you how much you can pay or if you can make accelerated payments. Going beyond these rules will result in prepayment penalties. Lenders have these penalties to prevent borrowers from paying off their mortgages without paying enough interest back. If you break their terms, it can cost you thousands of dollars. Make sure you carefully read your contract before you start making plans to pay off your mortgage early.
Involve a mortgage broker
The world of mortgages and prepayments can be confusing. As a borrower, the last thing you want to do is take advantage of prepayment privileges instead of owing prepayment penalties. If you want to learn more about prepayments and how they can benefit you, it’s important to involve a broker in the mortgage process. When you receive an offer from a lender, you will want to ensure you understand their terms and conditions. Having a mortgage broker walk you through the deal is the best way to do so!
If you have questions about how prepayment privileges impact you, I encourage you to reach out. We can discuss your mortgage and the options available to you.
If you have any questions about your mortgage, get in touch with me!