Prepayment of Mortgage



When we were getting a mortgage on our first house very few of us had a realistic plan of paying off the loan before retirement. However, the time went by, and at a certain point we came to a realization that we only have 10 years left before retirement while paying off the mortgage will take 15-20 years. We are faced with the dilemma: is there a possibility to pay off the mortgage sooner? And how to do, that if we can’t afford higher monthly mortgage payments?

The good news is that such possibilities do exist and today we will discuss one of them.

But first, a bit of financial basics. I will let you in on a ‘big secret’: any loan can be paid off sooner only if your monthly payments are higher than the regular ones specified by your creditor in the monthly statements. This procedure is called prepayment of loan. It would be a wonderful solution provided you have ex­tra funds in your family budget to afford higher payments. But what if you don’t? If that is the case, it is still not a good enough reason for you to feel frustrated. Remember our motto: never give up!

If you are unable to increase your month­ly payments, let’s try to bring down the mandatory monthly bill. In this case, you can start prepaying your mortgage without exceeding your regular monthly payments.

Example #1:

A. bill $ 1,400.00, check $ 1,400.00, prepayment = $ 0.00 / Mo & $ 0.00/ Year.

B. bill $ 900.00, check $ 1,400.00, prepayment = $ 500.00 /Mo & $ 6,000.00/year (!)

All looks great but how to lower your monthly bill? Fortunately, it’s not a dead end. There are options, and here is one of them.

For most of the homeowners who are now over 50 years of age, the amount of their present day loan is considerably lower compared to the initial loan. How­ever, this is not reflected in the amount of their monthly mortgage payment: the bill they receive is the same as 10-20 years ago since mortgage itself is an installment loan. So, the only way to reduce your bill is to refinance your mortgage making its remaining unpaid balance your new mortgage loan.

Example #2:

If your original mortgage was $ 300K, your monthly bill (principal and inter­est – P&I) would have been about $ 1,520.00 taking into consideration 30- year amortization and 4,5% interest rate. After 20 years of regular payments your mortgage amount had been reduced to about $147K. If you refinance the remaining amount at the same interest rate, your monthly payment will only be $ 745.00 (P&I). You will be paying $ 2,370.00 per year towards your new mortgage. This way we have achieved our goal: lowered regular monthly payments from $ 1,520.00 to $ 745.00 and, most importantly, received the opportunity to use the difference of $ 775.00 as a prepayment. We did that without using a single additional cent from the family budget.

Since you were able to afford $1,520.00 for mortgage payment per month before refinancing, you can continue making the same payment, but now $ 775.00 of your monthly pay­ment will be used to prepay your mort­gage. As a result, your mortgage will be reduced by $ 9,300.00 every year which means that without changing the amount of your monthly payments it will take about only 6 years for you to pay off the remaining loan.

Let’s now sum up the results. Prepay­ment method provided you the oppor­tunity to pay off your mortgage 4 years sooner (26 instead of 30) without in­creasing your monthly bill or withdrawing additional funds from the family budget. There is one more bonus that is often overlooked: since the length of the loan is reduced from 30 to 26 years, it has left a little over $ 90K in your pocket. This amount should be deducted from the payment of interest which means that if the interest rate on the mortgage was 4,5%, you, in fact, paid only 3%.

The end result has been achieved: we prepaid the mortgage without increasing monthly payments or withdrawing funds from the family budget.

There is more to come.

joseph RozenbergPlease call me for more information: 847-520-7030.