Rates in the 3% Range Rates Makes Extra Payments a Viable Option
Paying extra can make financial sense. It means a guaranteed return on investment, which isn't the case for investments like mutual funds or stocks. If your current mortgage interest rate is 5%, you are guaranteed to "earn" 5% by saving interest on any amount of principal you pay off.
Most conventional, FHA, VA and USDA mortgages allow you to make extra payments without penalty.
Making extra mortgage payments is not the right strategy for everyone. Homeowners often choose to refinance instead into a 15 or even 10 year mortgage. This drastically cuts the interest rate and slices several years off their mortgage.
Today's mortgage rates for shorter term loans or shorter amortization schedules make refinancing a very attractive proposition.
Deciding to refinance or make additional payments takes some examination but the right choice could help you save thousands and get you closer to a mortgage free life. Call me, 303.668.3350, to discuss all of the options available to you or apply now.
How Much Could You Save By Making Extra Payments?
The savings could be huge.
A 30 year fixed rate mortgage at 4% and $200,000 borrowed would require about $140,000 in interest over the life of the loan.
But if you were to prepay just an additional $100 a month toward principal, you would save about $30,000 in interest, and pay off that loan five years quicker.
Here’s another prepayment perk: unlike the capital gains and dividends earned on other types of investments like stocks and bonds, the savings earned from prepayments are not taxable.
The prepayment process is relatively simple. Take the time to write a separate check or send a separate electronic payment to your lender and explicitly state in the memo or on a separate note that this extra payment is to be applied toward the principal on your loan. Otherwise, the bank could possibly apply your extra payment to the next month’s interest.
In a quick call or online query, homeowners can find out how their mortgage servicer handles additional funds combined with a regular payment.
Should Extra Mortgage Payments Take First Priority?
Before embarking on a prepayment plan, you might want to consider more advantageous alternatives, says Jeff Rose, a certified financial planner in Carbondale, Ill.
A mortgage is just about the cheapest money you will ever borrow, with today’s rates at or below 4%. If you have other high interest debt such as credit cards or personal loans I would pay those off first before prepaying my mortgage. Mortgage interest you pay is tax deductible by prepaying your principal, you’ll pay less interest and, thus, get less of a tax write-off over the life of your loan.
In addition, homeowners with low rates might make more money in other investments than they could by paying down their sub 4% mortgage.
Refinancing Is An Effective Cost Saving Strategy
Another option is to refinance your mortgage to a shorter term, especially if you can lock in at rate lower than your existing rate.
This is like a forced savings plan where you’ll be committed to a monthly payment for a shorter term instead of only making occasional prepayments on your current term.
Here is a compelling scenario. A homeowner is two years into their thirty year mortgage of $200,000. He then refinances into a 15 year, dropping his rate by one percent. He would save over $85,000 in interest.
“If you need to keep cash liquid and you want to pursue other investment opportunities, you might not want to pay the mortgage down faster, especially if you have a low interest rate however, if you are staying in your home for the long term or you plan on keeping the home as a rental property, savings tens sometimes hundreds of thousands of dollars in interest can be a smart move
Paying Extra On Your Mortgage Ties Up Cash
The best prepayment prospects are usually young or older homeowners who aren’t raising children.
With children at home, you have a lot more expenses and things to save for, so paying the minimum on the mortgage and putting the rest into retirement and college savings funds usually makes the most sense.
However if a borrower has the available funds, I usually recommend they make at least one prepayment amount each year. And for anyone close to retirement, they should focus on prepaying to get their house paid off before they retire, which can make a huge difference in their standard of living down the road.
Before sending extra payments to your lender, make sure your mortgage is eligible for extra payments without penalty.
Examine all your options and determine which strategy – making extra payments or investing in other things – works best for your situation.
What Are Today’s Rates?
Mortgage rates are hitting new lows. Many homeowners will discover that a refinance will save them significant amounts in interest, even if they decide not to make extra payments.
Call today, 303.668.3350 and we can review all of the options available to you!
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Scott Synovic is a top performing mortgage loan originator providing superior levels of service and satisfaction to clients and business partners in Colorado - www.scottsynovic.com NMLS #253799 AnnieMac Home Mortgage #338923