Paying Off Your Mortgage Early

If you are seriously thinking of putting  a plan in place that is going to help you pay off your mortgage loan early, then make sure that you stay committed to it. Here are some tips to help you pay off your mortgage soon:

• Make Early Repayments: One great way to start paying off your mortgage early is by making payments into your mortgage account before the due date each month. This will help reduce the interest charges on your mortgage account and you will be amazed to see the amount you have saved in interest by just making early repayments into your mortgage.

• Use Your Lump-sum Payments: Each year if you have received a tax refund or a unused leave payment or an employment termination payment, plough these payments back into your mortgage to reduce the balance faster.

• Prepay Into Your Mortgage: By looking at the loan schedule on your mortgage you will be able to ascertain the interest and the principle component.  By doing this you will be able to make out what the principle component for the next month is going to be. Prepay a little in to your mortgage early each month and eventually by the end of the year you would have made an entire extra payment.

• Fortnightly Payments: Remember that if you are paying fortnightly you have 26 payments in a year and not 24. Consumers often make this mistake. The advantage of fortnightly payments is that at the end of the year just as we have stated above, you make an entire extra payment into your mortgage.

• Inform The Banks: If you are making extra contributions into your mortgage loan to pay it off early, make sure that you inform the banks of the same. You also must keep a tab that the payments are being used to reduce your principal component of the loan.

Pros And Cons Of Paying Off Your House Mortgage Early

Here are a few arguments that support the notion of paying off your mortgage early:

1. Once you have paid off your mortgage loan you are truly the outright owner of the property.
2. Paying off your house mortgage sooner also ensures that you are stress free as you have managed to get rid of a major financial liability.
3. Paying off your mortgage sooner also opens up a lot of other investment avenues.

Here are some arguments that do not support the notion of paying off your mortgage soon:

1. Once you have paid off your mortgage, you lose the ability to claim tax deduction on the interest component of your house.
2. Instead of paying off your mortgage early a lot of people are of the opinion that the surplus funds instead of being channelled into your mortgage could be used for investment purposes. This is however is very debateable as real estate investors would argue that after paying off your mortgage, you get another mortgage on the property and used the funds to buy an investment property and gain rental returns from it. This in turn would allow you to use the rental returns for investment purposes.

As we have seen there are arguments to both sides of the coin. However, there is no denying the fact that paying off your mortgage early has a lot more benefits than downsides.

References:

1. Tips on Paying Off A Mortgage Early – Consumer Tips and Reports
2. How to pay off your mortgage early – The Greenest Dollar

Mortgage loans are one of the most important credit contracts consumers can get. It is mandatory that you manage this credit contract the best you can, so that it does not negatively impact your credit report or impair it any further. Below are a few points that would help you manage your mortgage loan better.

1.    Timely Payments

The first and probably most important step towards managing your mortgage loan efficiently is making timely mortgage repayments. Analyze your individual pay cycle and depending on whether you get paid weekly, fortnightly or monthly, talk to your bank to arrange your mortgage repayments accordingly. These can be arranged either via a direct debit or via self credit (this is where you pay the nominated mortgage loan account yourself). Try to ensure that the payments fall a day after the money from your salary or wages have come into your bank account. This will ensure that you never miss a payment.

2.    Contact Your Funder

If you think that you are going to struggle with your mortgage loan repayments for a specified period, contact your mortgage lender immediately and inform them of the situation. They may be able to defer your mortgage interest payments or allow the interest payments to be capitalized Capitalizing means that the interest payments get added to your loan amount for the duration that you are unable to make the repayments. The last thing you want is for a missed repayment to appear on your credit report.

3.    Increased Contributions

If you have received a pay rise, have worked overtime or find that that at the end of the month you have surplus monies left over, put these extra funds towards your mortgage loan. This will help you build up a buffer (surplus of cash in your mortgage account which can be drawn down later at the mortgage holder’s discretion) for future contingencies and unexpected commitments.

4.    Use an Offset Account

An offset account could be a very handy tool in helping you combat the rise in your mortgage loan repayments. An offset account, in most cases offers you the same interest rate as that of your mortgage loan. Hence it is wise to have surplus funds in your mortgage loan offset account as this will help reduce the interest payments on your mortgage loan.

5.    Don’t draw out equity unnecessarily from your home

This is a very common mistake which mortgage clients make. Most mortgage clients do this in order to combat their spending habits. Drawing out the unused equity from your home is not a good idea.

Let us assume that your home is worth $350,000 and you have taken out a mortgage loan on it worth $280,000.00 (80% of the property value to avoid Loan Mortgage Insurance Implications, also known as LMI). In about 2 years time your home is worth $385,000 assuming a 10% increase over 2 years and your mortgage loan is down to about $250,000. In this situation the available equity in your property is 80% of $385,000 = $308,000 less your mortgage loan balance of 250,000 which is equal to $58,000. This means that you can increase your mortgage loan by getting an additional $58,000 from the mortgage lender without having any LMI implications.

Doing this is a bad idea because the progress you had made towards repaying your home off sooner will have been undone. This not only leverages mortgage clients further but also adds another credit enquiry to your credit report.

6.    Understand the Mortgage Product You Are In

It is very essential that you understand the type of mortgage loan product you have. Mortgage loans can be of various types. Most mortgage clients use the standard variable options in which the bank provides you with a product that uses the bank’s standard variable rate. In most cases these products have user and management fees, which can be charged to your mortgage loan account.

It is essential that you are aware of the fees and charges related to your mortgage loan account. These fees and charges can sometimes make your mortgage loan appear to be in arrears, which looks detrimental on your home loan statements and if ignored can trickle down to your credit report. Another situation is where in certain cases banks might charge you a penalty for excessive mortgage contributions. Banks can set a ceiling on the amount a client can contribute over and above the minimum repayments in a year. Mortgage clients should be aware that they do not exceed this limit or else they are running the risk of being penalized by the bank.

Another very powerful mortgage loan product is a Line of Credit, also known as an LOC. A line of credit allows the mortgage loan client to make the minimum repayments while allowing the mortgage interest to  capitalize as long as the loan amount stays below the master or the global limit (Master/Global limit is the maximum loan amount that is allowed under the particular facility for the mortgage loan client). This can be a very useful mortgage loan management tool.

7.    If Interest Rates Fall Do Not Reduce Your Contributions

A common mistake mortgage holders make is to reduce their repayments as interest rates fall. Keep your mortgage loan repayments constant as this will allow you to pay off you mortgage faster and this helps reduce the overall debt levels on your mortgage loan. Clients must remember that if interest rates are falling owing to troubled economic conditions, they will rise once the economy starts to stabilize. Hence it is better to get used to higher repayments rather than have to adjust with a sudden increase in mortgage repayments.

8.    Fixing of Interest Rates

In certain cases if you feel that you are comfortable with the current interest rates and mortgage loan repayments and you are anticipating future mortgage interest rate rises, it might be a good idea to lock in your interest rates for a fixed period depending on your mortgage lending facility. This will help you get on top of all your mortgage repayments and prepare for when you come out of the fixed rate period.

9.    Budgeting

It is always a good ploy to create a budget around your mortgage loan repayments. Once you have factored in your monthly mortgage loan repayments you can work out how much of a surplus of funds you have to meet all your other expenses. Once you have worked this out and have estimated your total monthly expenditure you can work out if you are in a situation to make extra contributions towards you mortgage loan or offset account.

10.    Refinancing

In certain cases it might be better for clients to refinance out of their existing mortgage facility. This is more common in cases where existing mortgage loan clients are in a product which has an excessively high interest rate or the mortgage loan product they are in does not provide them with the flexibility and ease of management when compared to some of the other mortgage loan products available in the market.

These tips provide you with a guideline to better manage your mortgage loan. Do not forget that mortgages are very important consumer credit facilities and it is advisable that mortgage loans should be managed efficiently. Missed mortgage repayments, mortgage arrears or mortgage defaults and court judgments can irreparably damage your credit report and your ability to get a consumer loan.

Take these few simple and easy steps towards better managing your mortgage loan facility and improving your credit report.