This post defines mortgage prepayment penalties and the costs and effects you may face should you consider paying off your mortgage loan early. Keep reading to find out the answers to the following common questions:

1. Does it make sense to pay off my mortgage early?
2. What are mortgage prepayment penalties?
3. How much will mortgage prepayment penalties cost me?
4. How can I avoid mortgage prepayment penalties?   

Deciding the Right Time to Pay Off Your Mortgage Early

Having a large mortgage loan looming over your head (and bank account) can be overwhelming. It’s common among homeowners to want to pay off their mortgage as soon as possible and own their home outright. But before you pay off your remaining mortgage balance, you must think through the financial ramifications of paying debt off early. 

Here are some questions to consider to know if it makes sense to pay off your mortgage early:

1. Will prepayment penalties apply to me? In general, mortgage prepayment penalties are applied in the first three years of your mortgage repayment schedule. 
2. How much money do I have saved to pay off the loan? Consider if the money you have sitting in your account is better off used for other investments.
3. If I pay off my mortgage, will I have enough saved in an emergency fund for other expenses? In addition to having investments, it’s always a good idea to have some liquid cash or assets that are easy to access in the case of an emergency. 

What Are Prepayment Penalties? 

Mortgage prepayment penalties

These sometimes called prepay penalties, are fees some mortgage lenders charge you when you pay off all or part of your mortgage loan before schedule. At their core, mortgage prepayment penalties have incentives for both borrowers and lenders. With traditional 15-year or 30-year mortgages, you as the borrower have a lower overall principal payment. On the other hand, your mortgage lender gets to collect interest over that same period of time. 

Paying off your mortgage early means your mortgage lender will not recoup the costs of lending you the money, leaving them in a riskier financial situation. 

Because mortgage lenders are taking a financial risk in lending you a large mortgage loan, the payments you make on your mortgage loan serve to protect the mortgage lender from any financial hardships if you fail to pay off the loan. The mortgage prepayment penalty sets a foundation for lower interest rates for you while protecting the lender with lower financial risk. 

Prepayment penalties do not incur on principal-only payments or yearly payments of less than 20% of the loan balance. However, once you cross that threshold or refinance your loan, prepayment penalties will likely be applied. 

Calculating How Much Your Prepayment Penalty Will Be

Mortgage prepayment penalties vary by lender. Depending on a variety of factors, such as loan type, length of the loan, and how much of an advanced payment you’re making, your mortgage prepayment penalty can quickly add up. 

Having said this, mortgage prepayment penalties are most often calculated as a percentage of your mortgage loan total or can be equal to a certain set of monthly interest payments. 

These are the most common calculations for determining a mortgage prepayment penalty fee:

1. A percentage of your remaining loan balance
2. A certain number of monthly interest payments (ex: 6 months’ interest)
3. A sliding scale based on the length of your mortgage
4. A pre-set amount fixed by the lender 

While some of these methods are more common than others, you should reach out to your mortgage lender to ensure you know how they process mortgage prepayment penalties and what the trigger is for such penalties.  

How to Avoid Mortgage Prepayment Penalties 

One of the best ways to avoid mortgage prepayment penalties is to work with a trusted home loan advocate like us to ensure you find the best lender for your unique situation before you purchase a home. 

Because many mortgage lenders write a prepayment penalty clause right into your mortgage contract, it’s important that you carefully consider all addendums and disclosure documents you sign at closing.  While prepayment was not on your mind when you closed on your new home loan, the truth is your lender knows prepayment on a mortgage loan comes with financial risk. 

Another option is to stay away from certain types of mortgage loans that include prepayment penalties as common contract provisions. Loans like conventional loans, Small Business Administration loans, subprime mortgages, and other alternative loan types. While it may seem that all mortgage loans include prepayment penalties, there are still options on the table. For example, USDA and FHA loans prohibit prepayment penalties. 

For a detailed list of mortgage loans available to buyers, check out our blog post given: here If you have questions about how mortgage prepayment penalties could affect your home-buying purchase or how to select a home mortgage lender that’s right for you. Contact us today

The post Will I Be Penalized for Paying Off My Mortgage Early? appeared first on Lendevity, Inc..

If you’re an average homebuyer, the likelihood is you will be paying your mortgage over the course of 15, 30, or even more years. Because of this, you must understand your current financial situation, your ability to pay back the loan over time, and the different loan requirements you may be subject to once you decide on a loan type. 

If you aren’t familiar with the types of mortgage loans available to homebuyers, check out our recent blog postWe outline the type of mortgage loans available, including common requirements and things you should consider before deciding on a specific loan type. 

In this post, we’ll go over the five tips you need to stick to before determining the home loan that’s right for you. 

Homebuying Tip #1: Calculate Your Budget 

The most important factor you should consider before starting your home buying journey is how big of a loan you can afford. Buying a home is more costly than ever and making sure your loan payments are a reasonable expense for you should be a critical factor in your research process.

Your budget includes far more than just how much house you can afford. Your homebuying budget should include:

1. The down payment needed when you purchase the home
2. The closing costs associated with the escrow process
3. Monthly mortgage payments that vary depending on your loan type
4. Principal payment installments over the course of your loan
5. The home insurance coverage appropriate for your area
6. Property taxes that may be due to your local government

Though this can sound like an overwhelming calculation, you can make it easier by sticking to some basic industry calculations. 

Homebuying Tip #2: Leverage Online Mortgage Calculators

Online calculators can help you determine a budget that is manageable for your income and lifestyle. Online calculators are a great tool for those who are a bit nervous running the numbers on their own. Online calculators, like our Lendevity Mortgage CalculatorIt works on a basic algorithm to help you understand the home price you can afford. Some online calculators work on the 28/36 rule to determine how much mortgage you can pay for a conforming mortgage. 

The 28% rule suggests you only spend 28% of your gross monthly income on your house payments, including principal, interest, insurance, and property taxes. While this rule is by no means “official,” it can help you determine a monthly cost you can afford. 

Other online calculators may use the 36% rule, which suggests you only spend 36% of your gross monthly income on all debts, which includes your mortgage payment, credit card payments, and other loans you may have.

Figuring out a budget for your new home purchase doesn’t need to feel daunting. Stick to the 28/36 rules as a starting point, then work with your lender to determine if that number can be adjusted.

Homebuying Tip #3: Improve Your Credit Score

Your credit score is a major factor to consider when seeking approval for a home loan. Every lender will rely on your credit score to determine how large of a mortgage you can take on and the interest rate that will be applied to your loan. 

Determined by your payment history and other loans, credit score requirements vary by mortgage loan type. For example, your lender may look for a credit score of at least 620 before considering offering a conventional mortgage. If you are hoping to have a lower interest rate, increasing your credit score before you apply for a home loan is a good idea. 

If you can pay off some of your debt, make more timely payments and stick to a budget before applying, your lender will likely be able to offer you more appealing loan options.

Homebuying Tip #4: Know Your Loan Requirements

While we just went over the importance of your budget and credit score, you should know that the requirements for every loan type are different. Some government-backed loans – likeVA loansIt may not require a typical down payment. If your credit score is lower than you’d like it to be, but you are still interested in purchasing a home, consider the following: FHA loanThe credit score requirements for these government-backed loans often are lower than conforming home loans and are worth exploring if you find you can’t meet typical credit requirements.

If you are interested in learning more about the different types of mortgage loans available to home buyers read our guideWe walk you through the most common loans available to homebuyers today to get you the most manageable option for you. 

Homebuying Tip #5: Shop Around

Now that you’re equipped with a budget, know your credit score, and have researched home loan requirements, your next step is shopping for a lender. All lenders are not created equal, and you may find that some lenders impose strict requirements. 

By shopping around different lenders, you can compare eligibility requirements and work with the lender offering the best rates and terms for your budget. 

And if all of this sounds like too much to do on your own: reach out to us todayHere at Lendevity, we’re committed to making the home buying process easy. We’ll get to know your situation and discuss your home buying goals to help you explore the rates, terms, and lenders that fit your needs.

The post 5 Tips for Determining Which Home Loan Is Right For You appeared first on Lendevity, Inc..