Paying Off Your Mortgage Early? Watch Out for Penalties!

Paying Off Your Mortgage Early- Watch Out for Penalties-150x150One of the many things to take into consideration when applying for a mortgage is the fact that, if you plan on paying off your mortgage before the loan term is up, you may have to pay a prepayment penalty. When taking out a mortgage loan, many home buyers tend not to think too far in the future, and so a prepayment penalty clause on the loan contract may go unnoticed at the time of the closing. After a few years, if the home owner decides to refinance or even pay off the mortgage loan, the prepayment penalty may come as a surprise and possibly interfere with his plans.

What is a Prepayment Penalty?

If your mortgage has a prepayment penalty, it means that you will be required to pay a specified penalty to your lender, if you decide on paying off your mortgage earlier than the term that was agreed upon.

In some cases, home owners choose to pay off their loan before the end of its term because they have come across a large amount of money and don’t want to make monthly mortgage payments anymore. But in most cases, home owners choose to prepay their mortgage loan because they have found a better loan from a different lender, with a lower interest rate. Usually, when interest rates decrease, a significant number of home owners choose to refinance, which makes prepayment numbers increase.

If you are not sure if there is a prepayment penalty on your mortgage, the easiest way to find out is by finding the paperwork from when you took out the loan and look for the mortgage note. The mortgage note is a document that promises to repay an amount of money and interest at the specified time, and also includes the prepayment penalty clause.

Prepayment penalties are not necessarily a bad thing. Agreeing to a prepayment penalty can result in a lower interest rate on your loan. Prepayment penalties are bad if you don’t realize that they are included in your mortgage contract at the time of the closing, and end up interfering with your plans and budget in the future.

How Can Paying Off Your Mortgage Early Hurt You?

Some mortgage loans only have short term prepayment penalties, but others have penalties that can be in effect for up to 3 to 5 years. Most people refinance their mortgages before then, so prepayment penalties end up hurting them financially, making the refinance process very expensive, and sometimes even impossible.

There is a type of prepayment penalty called a soft prepayment penalty which only goes into effect if you refinance. You won’t have to pay a penalty if you sell your home, but, unfortunately, most prepayment penalties are the type that will affect both events.

Lowering Your Prepayment Penalty

Prepayment penalties may seem like just a tactic to rob you of some money, but they are legitimate, and will come back to haunt you at the worst of times, if you haven’t been paying attention when you closed on your mortgage loan. Fortunately, there are ways in which this penalty can be lowered.

Check the contract and read the fine print. Find out if there is a prepayment penalty clause in your contract and what it entails. Some prepayment penalties require you to pay a single fee, while others are based on how long you have made payments on your loan. The percent difference between getting out of a mortgage loan after one year or after 4 years translates into thousands of dollars. If you are close to reaching a threshold, then waiting a few months is not a bad idea, and it will save you a significant amount of money.

Contact the lender and start negotiating. You will probably have to speak to a few people before finding the employee who has the power to help you, or at least answer your questions, so don’t give up after talking to the first person who answers. There’s a strong chance that your prepayment penalty will be reduced if you politely present your case and ask for a reduction. Make sure that you make note of everyone you spoke to, and try to get the prepayment penalty reduction in writing.

A prepayment penalty can be a very unpleasant surprise at a time when you have taken some important decisions, like paying off your mortgage loan or refinancing. Making sure that you thoroughly read all the documents required at closing before signing them will save you a lot of trouble in the next several years. Also, remember that prepayment penalties are not a bad choice if you are trying to reduce the cost of your loan. A lower interest rate acquired by agreeing to a prepayment penalty will save you a significant amount of money over time.

3 Quick Steps for Negotiating Mortgage Forbearance

3 Quick Steps for Negotiating Mortgage Forbearance- 150x150Money trouble can occur at any time and can make the repayment of a mortgage loan very difficult. Especially during and after an economic recession, the chances of losing your home are much greater. One way in which a borrower can save himself from losing his home is by making an agreement with his lender, in which the lender agrees to not foreclose on the borrower’s mortgage, if the borrower agrees to start making payments that will bring him up to date on his mortgage repayment.

This agreement is called mortgage forbearance and it’s designed to help borrowers who are going through tough financial times. Borrowers can stop making mortgage payments or even postpone them for a period of time, after which they can catch up and resume making regular monthly payments. Mortgage forbearance also allows the borrower to negotiate some of the default amount with their lender.

Is Mortgage Forbearance the Right Option for You?

Mortgage forbearance is a good option for those who experience temporary financial hardships, such as changes in employment, an expensive divorce, a death in the borrower’s family, having to temporarily pay two mortgages due to a job relocation, military service, or being jailed. If you consider that your financial troubles are only temporary and you will be able to recover shortly, then mortgage forbearance is worth taking into account.

If your financial hardship is of a more permanent nature, your lender may still agree to a mortgage forbearance if they consider that you have enough equity in your home and will be able to refinance with another lending institution. Either way, you will need to go through the necessary steps in order to obtain a mortgage forbearance agreement.

Obtaining Mortgage Forbearance

  1. Analyze your financial situation and call your lender. Carefully analyze not only the unexpected decrease in income or increased expenses, but also every source of monthly income and all expenses. Your lender will want to know all these aspects of your financial situation in detail, so researching them thoroughly will help you and your lender both better determine if your financial crisis is temporary or permanent, and how long will it take you to recover. Your income sources may include salaries, child support, financial aid, pension or veteran’s benefits, home rental income and others. Expenses may include loan and rental payments, food, utilities and many others. Having every source of income and expense laid out in front of you can also help you determine where improvements can be made in order to get out of this situation quicker.
  2. Write a hardship letter. After writing down all your sources of income and expenses, and determining that even after making changes, your expenses are still greater than your income, it is time to document your financial situation to your lending institution through a hardship letter. Lenders have great resources for finding out information about your income and expenses, so it’s recommended to be completely honest and provide all of the necessary information in your hardship letter.
  3. Sign the mortgage forbearance agreement. After receiving your hardship letter, if your lender approves your request for mortgage forbearance, the last step is for you to read the agreement and sign it. The lender agrees to not file for foreclosure for the duration of the agreement, and you agree to catch up on your mortgage payments. Mortgage forbearance will not waive the interest that you must pay, or the late fees.

Mortgage forbearance is a great way of getting back on track with your mortgage repayment and avoid losing your home to foreclosure. But before committing yourself to this agreement, make sure that you fully understand what it involves, and that you will be able to recover from your financial hardship in a short time. Also, make sure that the mortgage forbearance is the right choice for your financial needs and not just a tool that will help postpone the inevitable mortgage default.


How a Graduated Payment Mortgage Can Help You

How a Graduated Payment Mortgage Can Help You- 150x150One of the many loan options that home buyers have today is the graduated payment mortgage (GPM). In a graduated payment mortgage, your mortgage payments start low and increase gradually over a pre-determined period of time. This type of loan is very beneficial for people who can’t afford a large monthly mortgage payment shortly after becoming home owners, but expect to have a better financial situation and afford larger mortgage payments in the future. Most people that his type of loan is geared towards are college/university students or recent graduates who wish to become home owners, but can’t afford to make the often large payments that come with conventional mortgage loans.

How Does a Graduated Payment Mortgage Work?

Because the graduated payment mortgage is designed to help those who can’t afford to make large payments on their mortgage, the loan has an initial period when the interest rate is very low. This is followed by a period of 3 to 5 years when the interest rate increases gradually and remains fixed for the remainder of the loan. The payment increase can be from 2.5 percent to 7.5 percent in the first 5 years, or 2-3 percent over 10 years.

The graduated payment mortgage uses a negative amortization schedule, meaning that at first your monthly mortgage payments will include a smaller interest payment than the one owed on the loan, while the remaining interest will be added to the principal. This makes it easier for you to get approved for this type of mortgage loan, but the downside is that the overall cost of the mortgage loan will be higher.

Graduated payment mortgages are not a favorite type of loan for most lenders as it is considered to have a higher degree of risk, so it is most likely that you will receive a higher interest rate than on a regular fixed -rate mortgage loan.

Benefits of a Graduated Payment Mortgage

Graduated payment mortgages can be very beneficial, depending on your situation and the plans that you have for your future. Here are the advantages that a graduated payment mortgage comes with:

  • The largest benefit that a graduated payment mortgage has is that it allows someone with a lower income to become a home owner. People who expect to see an increase in their income in the next few years after taking on a mortgage shouldn’t have a problem acquiring a GPM. Because of the low initial mortgage payments, you will be able to make monthly payments on your mortgage loan while increasing your income.
  • You have a greater flexibility in choosing the type of home that you purchase. This is also an effect of the low initial payments. By paying less for the first few years, you gain more buying power, allowing you more flexibility on the price.
  • People with lower credit scores and not so perfect credit histories can qualify for this type of loan and become home owners much easier than they would for a regular mortgage loan.

Risks of a Graduated Payment Mortgage

The greatest risk that comes with a graduated payment mortgage is that the borrower doesn’t fully understand how much his or her mortgage payments will increase after the initial period, leading to financial troubles or even losing their home. This can happen due to poor budgeting or unrealistic income growth expectations. The initial payments may seem very attractive, but before you know it, a few years go by and you are required to make much higher payments that may be more difficult for you to budget for.

Graduated payment mortgages can be very advantageous for someone who has properly researched what this type of loan offers. But, as with any loan designed to help the home buyer qualify much easier, you will find that the graduated payment mortgage will end up costing you more than a regular fixed-rate loan. This tradeoff is not necessarily that bad for people who expect an income growth but want to become home owners before this happens.


How to Calculate Mortgage Payments

Figuring the right way to calculate your home mortgage is one of the most important components to buying a home.

How to Calculate Mortgage Payments:

There are several parts to a mortgage payment. Not including every detail can cause an unpleasant and extremely mortgage calculatorstressful time for you the home-buyer. You are going to calculate the monthly mortgage payment (principal plus interest) based on the loan amount which is the amount of money you are borrowing. You have to consider the term of the loan, meaning how many years it will take to pay off the loan, as well as the mortgage interest rate you are able to get on the loan. Most mortgage companies and banks have actual MORTGAGE CALCULATORS on their websites for your convenience.

You will need to determine the annual property taxes for your new home. The seller or listing agent can help you with that amount. You will divide this number by 12 to get your monthly taxes on your home.

Homeowner’s insurance is a must. It will not be optional. You will need to get an annual insurance quote from your insurance company. They will need to provide a declarations page to the mortgage company as proof of the insured.

If your loan program requires private mortgage insurance (PMI) you will need to figure that number as well. PMI is required by many lenders on first-time buyers due to the amount of down payment they are able to pay. Your mortgage company will help you understand mortgage refinancing and private mortgage insurance and whether it is applicable to your loan.

For Example:

Loan amount: $150,000
Loan Term: 30 years
Interest Rate: 4.75%

Monthly Mortgage Payment: $782.47

Mortgage Loan Payment $782.47 + Monthly Taxes + Monthly Homeowners Insurance = Total Monthly Payment