Pre-Payments are additional payments outside of your regular monthly mortgage payments. Why might you want to pre-pay? To knock down the principal on your mortgage, and pay off your home sooner.
Charges
Yes, there are pre-payment charges. Lenders in the mortgage industry need to make money somehow, so there are all kinds of fees, rules, and other types of charges when dealing with lenders. All lenders will have Pre-Payment Privileges; you just have to ask about them.
Types of Pre-Payments
Lump Sum Payments: these are single payments that are generally made in large amounts to try and knock down the balance owing on your home.
Double-Up: double-up payments are pretty self explanatory, you are doubling your monthly payment.
Payment Increases: With payment increases, you are usually given a certain percentage that you can increase your payments by.
Now that we have gone over the different types of pre-payments that you can make, you might be under the assumption that you can make payments on your home at any point, after all you do own it… As all lenders have their own rules and penalties setup, as mentioned above, some might even want to try and restrict when you can make those payments. Some lenders will only allow you to pre-pay on the anniversary date of your mortgage.
Understanding Pre-Payments
You have a great paying job, payments are being made when they’re supposed to, and you have some extra cash laying around. What better idea than to try and pay off your mortgage faster, right? Wrong. The absolute first thing that you will want to do prior to making any additional payments on your mortgage, is to find out how much you can pre-pay, and when you can make those pre-payments.
Some Lenders will limit you to 10% pre-payments, while others may allow you up to 20%.
Anything outside of your Pre-Payment privileges may be subject to penalties, and there are cases where these penalties can be substantial, and not worth it.
When making these additional payments on your home, you might end up paying off your home much sooner since your additional payments are being made to the principle of the home, and not the interest. Your additional payments could mean years less that you have to pay.
How are Pre-Payment Penalties calculated?
Every lender is going to charge fairly similarly, by charging you based on the Interest Rate Differential.
Interest Rate Differential is generally calculated by using the following method:
Your Current Rate, and Remaining Term (i.e. 3.49% and 23 months). Subtract the current posted rate closest to your remaining term (we use the posted 2 year in this case) subtracted by your discount (i.e Current 2 Year posted rate 3.24% - your discount 1.3% = 1.94%). Then this gets divided by 12 months per year. Lastly it will get multiplied by the time left on your mortgage, and amount left owing.
Math example : 3.49% - ( 3.24% - 1.3% ) / 12 months * Balance Owing * 23 months = Penalty
If you haven’t asked the right questions, you might end up owing thousands of dollars to your lender because there were pre-payments that were made on the wrong date, or an amount that is not allowed.
Make sure that you know what your Pre-Payment privileges are before pre-paying, and when/how much you can pre-pay without any penalties.
For a better understanding of pre-payment charges, and what your lender may allow, or to explore different options, contact me today!