Simple Interest Mortgages vs. Traditional Interest Mortgages

Simple Interest Mortgages vs. Traditional Interest Mortgages-150x150When they buy a home, most home buyers take out a traditional mortgage to pay for their purchase. Traditional mortgages are recommended for most borrowers, but you should be aware that there is another, very similar, type of mortgage that may be to your advantage. The simple interest mortgage uses a different method of calculating interest due on your mortgage loan. If this type of mortgage is used correctly, it can help you pay off your mortgage faster.

How is the Interest Calculated?

The interest on a traditional mortgage is calculated monthly. The annual interest rate is divided by 12 and the monthly rate is used to determine the interest on each monthly payment. For example, on a 30 year fixed-rate mortgage with an interest rate of 3.6 percent, the 3.6 is divided by 12. The resulting 0.3 percent is multiplied by the loan balance in order to find out the interest that has to be paid.

The interest on a simple interest mortgage is calculated daily, by dividing the annual interest rate by 365, then multiplying the result with the loan balance. If we use this formula for the example above, the interest on a 30 year fixed-rate mortgage with a 3.6 percent interest rate would be calculated by dividing 3.6 by 365. The result, 0.00986, will be then multiplied by the loan balance in order to calculate the daily interest that must be paid. These daily charges will be then added up every month in order to determine your monthly interest payment.

Which One is Better?

The answer to that question is yes and no, depending on how you plan on using the mortgage. If you make your monthly mortgage payment on its due date each month, without being late or missing a payment, then both simple interest and traditional interest mortgages will cost almost the same. However, if you are late with your monthly payment, the difference between the costs of the two types of mortgages will become much larger.

When making payments on your mortgage, you are typically allowed a “grace period” of 10-15 days after the due date, in which you can still make the payment with no repercussions. Traditional interest mortgages calculate the interest once per month, so you can take full advantage of this grace period. However, being late on a monthly payment when you have a simple interest mortgage means that you will be paying a slightly higher interest for the days that you were late, because the interest is calculated daily. This interest can accumulate over the life of the loan costing you several thousands of dollars.

You can turn having a simple interest mortgage to your advantage by making your monthly mortgage payments before the due date each month. This strategy will result in interest savings, which can also accumulate over the life of a loan, making a simple interest mortgage cheaper than a traditional one.

There is no simple answer when comparing simple interest mortgages to traditional interest mortgages. The best thing to do is research both of them, figure out what your possibilities and future plans are, and find out which one of these two types of mortgages would suit you better.

Mortgage Counseling Services You Need

Mortgage Counseling Services You Need- 150x150Many people wouldn’t be able to afford a home without mortgage loans. Mortgages might come with some disadvantages, but are a great way of making sure that you have a roof over your head, and something to leave your kids. Paying off a mortgage is a great feeling, the feeling that you are truly a home owner, but getting there requires some careful budgeting, because there will always be the risk of not being able to afford paying your mortgage anymore and losing the home.

Being a responsible home owner is mostly up to you, but looking for help when you think you need it is nothing to be ashamed about. Just like marriage counseling can save a marriage, mortgage counseling can help you make the best decision regarding what type of loan to take out and what you can do to make sure that paying off your mortgage goes smoothly and with no major problems. Home buyers who receive mortgage counseling prior to making a home purchase are less likely to default on their mortgage, and less likely to even be late or miss mortgage payments.

Mortgage Counseling Services

You have many mortgage counselors to choose from if you need help understanding your mortgage or making sure that you make the right choice, but it is recommended that you visit a counselor that is government approved. By doing this you are making sure that you receive the most up to date and complete information.

Before setting up an appointment with a mortgage counselor, make sure that you gather as much information as possible about your mortgage, account balances and debt, income, and find your most recent tax return. Being able to show all this info to your counselor will ensure that your paperwork will be filled out much easily. These documents will also help your counselor work with you to determine a budget that accommodates your financial situation and needs. Here are the most important services that mortgage counseling organizations are offering.

  • Pre-purchase mortgage counseling. Many home buyers need help in deciding which type of mortgage loan to choose. Making sure that you pick the right one, with the right terms, is probably the most important thing you can do when shopping around for a mortgage loan. The down payment that you will have to make, the interest rate that you will be paying, the length of the repayment period, and all the fees that you will be paying must be discussed before you decide on a loan, in order to find out if that type of mortgage will be right for you.
  • Post-purchase mortgage counseling. A large part of your income will go towards paying your mortgage each month, and some home buyers might find that a little overwhelming. Post-purchase counseling can help you better manage your monthly expenses as well as give you advice regarding mortgage refinancing and other loans that you can take out. This type of counseling is also very important, and can make a big difference if you are struggling, or are unable to make a decision regarding your mortgage loan.
  • Mortgage refinance counseling. Refinancing is a great way of lowering your monthly mortgage payments by taking out a new mortgage loan to replace your current one. Unfortunately, refinancing is an expensive process which can actually end up costing you more than you expected if you are not sure what you are doing. A refinance counselor will work with you to determine if refinancing is the right step, and how much you will be saving over your current mortgage rate.
  • Mortgage default counseling. At one point during your life, you may encounter some problems that will make paying your mortgage difficult. In order to avoid foreclosure, you can hire a mortgage default counselor, who will help you address the problem in the best way possible. When faced with losing your home, it would be better to get professional help than to try to do things yourself. Receiving the proper help in this situation can make a big difference and your chances of keeping your home will be much higher.

Unless you feel that you have good knowledge on the subject, mortgage counseling services can be very helpful and save you money and trouble in the long run. Being prepared when the time comes to take out a mortgage loan or refinance your mortgage makes a large difference over going in blindly and ending up losing money, or even your home. Mortgage counseling services are designed to help you become a home owner, and deal with the problems that may arise in the life of a home owner.

Mortgage Loan Recasting – An Option You’ve Never Heard Of

Mortgage Loan Recasting-An Option Youve Never Heard Of- 150x150When you buy a home using a mortgage loan, you will have to repay your lender by making monthly payments. These mortgage payments usually stay the same for the duration of the repayment period. Over the years, coming up with the money for the monthly mortgage payment can be a burden, or you may simply come to the conclusion that your payment is too large and would like to lower it.

There are two ways in which you can lower your monthly payment. The first one, and the most popular, is refinancing, which helps you get a new loan with better terms. Unfortunately, the high cost of refinancing can make this option seem less appealing, especially if current mortgage rates are not that advantageous. In that situation, you could actually be losing money by refinancing. So, when refinancing, you have to make sure that the new loan plus the closing costs won’t end up costing you more money than your original mortgage loan. Refinancing is usually a great choice when interest rates are very low and when you are sure that you are able to secure a much lower rate than you have now. The second option that you have, when you want to reduce your monthly payment, is mortgage loan recasting. Depending on what interest rates are offered by lenders and on what your current financial situation is, mortgage loan recasting can make more sense than refinancing.

What is Mortgage Loan Recasting?

On most mortgage loans, the monthly payment stays the same until the loan is paid off. You may want to reduce your monthly mortgage payment because you want to pay less interest or simply because you have recently received a large sum of money, possibly from an inheritance or a holiday bonus. Most lenders don’t allow you to repay your mortgage loan earlier, so your only option is to recast your mortgage. When recasting a mortgage loan, you make a larger payment towards the principal on your loan, after which your lender will calculate a new amortization schedule which will be based on your new mortgage loan balance.

Mortgage loan recasting is a good alternative for borrowers who are unable to refinance due to having low home equity, or for those who have come to the conclusion that it is not a good time to refinance their mortgage. Mortgage loan recasting is also significantly less expensive than refinancing. On average, mortgage recasting only costs a few hundred dollars.

Advantages and Disadvantages to Mortgage Loan Recasting

The largest benefit that recasting your mortgage loan has is that it reduces the remaining balance on your loan, therefore making your monthly mortgage payment lower. You have the option of making the same monthly payment and paying off your mortgage loan quicker, or using the difference for other expenses. Another advantage is when buying a new home before you have sold your previous one. After finally making the sale, you can use the profit to recast your new mortgage.

The biggest disadvantage of mortgage loan recasting is that you have to make a large payment towards the principal of the mortgage loan. That sum of money could be invested into something that could yield a return, or simply kept in a savings account as an emergency fund. Another disadvantage, especially when compared to refinancing, is that the interest rate on your loan will stay the same after mortgage loan recasting. If interest rates are low, it could make more sense to refinance and lower the interest rate on your mortgage.

Before deciding to do a mortgage loan recasting, make sure that you understand what the advantages and disadvantages are, and make sure that refinancing isn’t a better option. Your main goal should be saving money, and you should always take the path that brings you the most savings.

 

Here’s What You Can Do When Turned Down for Refinancing

Here's What You Can Do When Turned Down for Refinancing- 150x150Refinancing is a great way of saving money on your mortgage when interest rates are low. Refinancing has strict guidelines, and making your mortgage payments on time may not be enough to convince your lender to allow you to refinance. Mortgage refinancing requires a home appraisal, a significant number of documents that show your income and assets, and a good credit score. Not meeting one of the lender’s requirements may result in a denial. Fortunately, being turned down for refinancing is not the end of the world and you should know that you still have options. Here are a few reasons why you may be denied and what you can do to make refinancing possible.

Little or No Equity in Your Home

The number one reason why home owners are being refused when trying to refinance is the lack of home equity. Your problems don’t even have to go as far as being underwater on your mortgage, or owing a larger amount than your home is worth. Simply having low or no equity in your home can trigger a denial from your lender, because they prefer a borrower who has a nice amount of cash tied up in his or her home. The simplest way out of this situation is to come up with more cash, but, if you take into account the high refinancing closing costs, you might realize that a few extra thousands will be hard to find.

An alternative would be the Home Affordable Refinance Program (HARP), designed by the government to help home owners with little or no equity in their homes. Recently, this program has undergone some changes, which should help you get approved easier than before. The program is designed for home owners who have less than 20 percent equity in their homes, but some lenders might use their own guidelines when deciding if you qualify for HARP.

Another alternative would be refinancing into a Federal Housing Administration (FHA) mortgage. FHA mortgages require a low down payment and equity, but you may be required to pay additional insurance on this type of government insured mortgage loan.

Low Credit Score

Your credit score has a large impact on not only your interest rates and the loan value, but also on whether you will be allowed to refinance or not. If your credit score is bad, your only chance of refinancing is by improving it. It might take a year or two, but if your credit score wasn’t affected by anything major, you should get it into a more favorable range with little effort. Paying your bills on time is the first and most important step when trying to increase your credit score. If, however, you have a large blemish on your credit report, such as a bankruptcy, then increasing your credit score will prove to be more difficult and can take up to 10 years.

Low Income

Lenders usually require your debt to not exceed 43 percent of your monthly income, while monthly mortgage payments, property taxes and insurance are limited to 30 percent. Reducing your debt can help tremendously when trying to look better in the eyes of a lender. You could quickly pay off some or all of your debt if you have access to savings or other investments. Some of these solutions might not be the best, and it all depends on your situation, and how much you want or need to refinance.

Of course, the simplest thing you can do when being turned down for refinancing is talking to another lender. Lenders are in competition and sometimes have significantly different offers for their customers, so shopping around is always a great idea, even if you are approved by one lender. You might find a more attractive offer with a lower interest rate or closing costs somewhere else. Don’t be discouraged if your refinancing is declined because there are ways in which you can drastically improve your chances in a very short amount of time.

Do You Need PMI? Not If Your Home is Underwater!

Do You Need PMI-Not If Your Home is Underwater-150x150Sometimes the housing market changes radically and you end up paying mortgage on a home that has lost significant market value since it was purchased. This situation has become very common in the last few years, since the housing bubble burst and the US went into a recession. Many home owners have found themselves having to make the same large monthly payment on a home that is worth much less than before the recession. When this happens, homes become really hard to sell because their value is less than what the owners owe on their mortgages. Because of this, many homes were classified as distressed, creating large financial problems for home owners who wish to sell.

When a home buyer purchases a home and are able to put less than 20 percent down, they are typically required to purchase Private Mortgage Insurance (PMI). This is an attractive alternative for home buyers who don’t want to wait until they save more money to put as a down payment. Being underwater on your mortgage and having to pay Private Mortgage Insurance on top of the high monthly payments makes it very difficult for home owners to keep their home. Abandoning the home and buying another one, which will have a lower monthly payment, seems like a better alternative.

The Homeowners Protection Act of 1998 states that Private Mortgage Insurance can be canceled when you reach 20 percent equity in your home. When the equity in your home reaches 22 percent, PMI should be dropped automatically, but many times lenders don’t remove the policy until they are reminded. Unfortunately, many home owners don’t know this. If you are underwater on your mortgage, you can have your PMI canceled.

Qualifying to Have Your PMI Canceled

Even if your home is worth less than when you purchased it and you owe more on your mortgage than the home is currently worth, you can still have the Private Mortgage Insurance canceled. There are, however, a few qualification guidelines that you should be aware of:

  • The equity in your home has to be 20 percent or larger.
  • Your monthly mortgage payments must be up to date, with no missed payments.
  • Sometimes it is required that you don’t have any late mortgage payments for the last 6 months.
  • You must have been the owner of the home for at least 2 years.
  • There must not be any second liens on your property, such as a home equity loan or a second mortgage.
  • The property must not be a vacation home.

Even if the law states that the Private Mortgage Insurance must be canceled once the equity in your home reaches 22 percent, be prepared to have a difficult time getting your lender to actually do it. You have to send them several documents related to your mortgage and a letter requesting the cancellation. Your lender has all of this information already, so this is done mostly to prove to them that you are an informed customer.

Being underwater on your mortgage is hard enough without having to pay Private Mortgage Insurance, as well. Having to make the same payments on a home that is now worth significantly less than it did at the time of purchase might not make a lot of sense, unless it’s your dream home and you have become emotionally attached to it. Fortunately, by canceling your Private Mortgage Insurance you can free up some much needed cash, which will certainly make your life easier.

 

Tips and Tricks for Reducing Your Mortgage

Tips and Tricks for Reducing Your Mortgage- 150x150Depending on the amount borrowed for your mortgage loan and many other factors, like the interest rate and the loan repayment term, monthly mortgage payments can be as high as several thousand dollars and is most likely your largest monthly bill. Reducing your mortgage will make payments smaller, saving you money and making your life easier. Whether your monthly mortgage payment is very high or not, saving money is something that benefits everyone, especially those who are going through financial issues. Fortunately, there are some tips and tricks for reducing your mortgage that every home owner should know about.

Tips and Tricks

  1. Refinance your home. Taking out a new loan, with different terms, to pay for your mortgage could be the best way to save money and reduce your mortgage. Refinancing into a lower interest rate loan will drastically reduce your monthly payment and make your mortgage easier to pay. However, the mortgage refinancing process can be fairly expensive, so you should take all costs into account if you decide to take this route. Also, because you will mostly be paying interest towards the beginning of the loan, it’s important to refinance as soon as possible and obtain a lower interest rate, saving more than if you refinanced later into the repayment period when you won’t be paying so much interest on the loan.
  2. Cancel private mortgage insurance. If you couldn’t afford to make the 20 percent down payment, then you are probably paying for mortgage insurance, as this is required for those who can’t make the minimum down payment. Private mortgage insurance can mean thousands of dollars monthly. If you have repaid enough of the loan to gain at least 20 percent equity in your home, then you can contact your lender and discuss cancelling your private mortgage insurance. Your lender will have your home appraised to determine its value, and cancel your private mortgage insurance. Lenders don’t drop the insurance on their own, so you will have to contact them about this when the time comes.
  3. Shorten the term of your mortgage loan. While shortening the loan term won’t make your monthly mortgage payments smaller but will actually increase them, it will significantly lower the overall cost of the loan. Paying off your mortgage loan quicker means you will be paying less in interest, which can save you thousands of dollars. If you come to the conclusion that you can afford to make larger monthly payments toward your mortgage loan, then shortening the length of your loan is a sure way of reducing your mortgage.
  4. Extend the term of your mortgage loan. If monthly payments start to become a burden, then a way of reducing them is if you extend the length of your loan, for example from a 15-year to a 30-year mortgage. However, this means that you will be paying significantly more in interest, which will increase the overall loan value. You will still be able to make extra payments on your loan, which will pay it off quicker, and your monthly payments will be much lower.
  5. Make extra payments on your loan. While this doesn’t sound like something that will help you reduce your mortgage, making extra mortgage payments will help you pay off the loan quicker and save thousands in interest costs. Of course, if you can make regular extra payments, you should just reduce the term of your loan and pay the higher monthly payments. But making a few extra payments now and then will still be of great help in reducing the cost of your loan, and diminish its term.

Being able to reduce your mortgage depends mainly on your financial situation and budget. Take some time to carefully evaluate your monthly expenses and decide if you can make some changes to your mortgage in order to help you save money.

Are Interest-Only Mortgages a Good Idea?

Are Interest Only Mortgages a Good Idea- 150x150An interest-only mortgage is a type of loan in which the borrower is required to only pay the interest on the principal for a predetermined amount of time. When the term of the interest-only mortgage comes to an end, the borrower can either renew the interest-only mortgage or pay off the loan through conventional means, such as a regular mortgage. Conventional mortgage loans require you to pay interest and part of the principal each month, which makes interest-only mortgages a more attractive choice for those who can’t afford a large mortgage payment for the time being.

Popular interest-only mortgage loans don’t allow the borrower to make interest-only payments for a long time and are usually limited to a three to ten years period of interest-only payments, after which the borrower starts making payments towards the principal as well, which will increase his or her monthly payments.

Advantages and Disadvantages of an Interest-Only Mortgage

Like most mortgage loans, interest-only mortgages have their advantages and disadvantages, which means that only home buyers with a certain financial situation will benefit from this type of mortgage, while others will probably benefit from a more conventional type of loan. The most important advantages and disadvantages of an interest-only mortgage loan are:

  • Low monthly payments in the beginning. While conventional mortgage loans require each monthly payment to go towards paying both the interest and the principal, interest-only mortgages allow the borrower to make only interest payments for the initial period of three to ten years. This will result in much lower monthly payments for the duration of the initial period, which makes this type of mortgage loan more attractive for first time buyers and people or families who are expecting an increase in their income within the next few years. With this type of loan, you are able to buy a home even if you don’t have a large income at the time. However, once the initial period is over, you must be able to afford larger mortgage payments as you have to start paying off the principal as well.
  • High monthly payments later. When the interest-only payment period ends, the amount that you will have to pay on your mortgage monthly may increase significantly because you will start making payments towards the loan principal as well. Home buyers who aren’t prepared will face the risk of not being able to afford to pay their mortgage anymore. The duration of the interest-only period has a large impact on how much your monthly payments will increase. The longer the initial period, the higher your mortgage payments will be once the second repayment period begins.
  • You can qualify for a larger mortgage loan. When applying for a mortgage loan, the amount that you can borrow is closely related to your income, and how much the lender determines that you can afford to pay monthly. Because monthly payments are lower on an interest-only mortgage loan than they are on a conventional loan, you will be able to borrow more.
  • You will have to deal with an adjustable interest rate later. Interest-only mortgage loans start out with a fixed interest rate, but the rate will become adjustable later on when the second period starts or even earlier. If the interest rate decreases, you’re in luck because your monthly payment will decrease as well, but if interest rates go up, your mortgage payment will increase, too.

Interest-only mortgages are great for first time home buyers. Most of the time, new home owners, being unaccustomed to having a monthly mortgage payment, will struggle with their budget. Interest-only mortgages have lower monthly payments for the first few years, giving first time home owners the chance to get used  to making mortgage payments. Whether you are a first time home buyer or not, you should carefully weigh in on the disadvantages of this type of mortgage. The payments may be smaller in the beginning but, if you don’t plan accordingly, you can run into some serious trouble when the second repayment period comes along and your mortgage payment increases.

5 Quick Reasons for Not Paying Off Your Mortgage Early

5 Reasons Why You Shouldnt Pay Off Your Mortgage Early-150x150Paying off your mortgage early sounds appealing and in some cases is a good choice, but there are several reasons you shouldn’t do it. Depending on your financial situation, it may be more beneficial for you to keep paying your mortgage month to month, as it was agreed upon. Of course, paying it off early will rid you of a very large monthly bill. But if you have other debt, or don’t have any other savings, this move can interfere with other areas of your financial situation, making your life harder. Here are the most important reasons why paying off your mortgage early is not recommended.

Reasons to Not Pay Your Mortgage Off Early

  1. You have other debt. Because interest rates on consumer loans, such as a car loan or a credit card are much higher, it is recommended that you pay those off first. For example, it would be to your advantage to pay off a loan that has a 15 percent interest rate before paying off your mortgage which has a 5 percent interest rate. Your mortgage interest may be tax deductible, unlike interest on a credit card debt. So, before you even start to consider paying off your mortgage early, make sure that you have paid your other debts.
  2. You will be left without savings. Paying off your mortgage early will make things easier for you because you won’t have that large monthly payment to worry about anymore. But if this leaves you with no savings, this puts you at great risk in the event of a job loss or illness. Also, you could use that money to beef up your retirement savings, or start a college fund for your children.
  3. You won’t be earning interest on that money. Paying off your mortgage early will earn you zero return. Placing that money into a savings or retirement account will earn you money over time. It won’t be a significant amount of money, but it will still be better than paying off your mortgage and earning nothing.
  4. There’s a chance that you will move in the near future. This mostly depends on each individual or family, but studies have shown that most people live in a house for 5 to 7 years. Paying off a mortgage early if you don’t plan on living in the home for more than 30 years is not very beneficial. If you are selling your home after only a few years, you will get back all the money that you paid each month.
  5. Inflation will make your overall loan value cheaper. Because inflation rises a few percent per year, as time goes on, your mortgage loan will become cheaper. The monthly mortgage payment that you made this month won’t have the same value as it will 15 years from now. As prices for everything increase over time, your mortgage payment will remain the same.

Paying off your mortgage also has a few advantages, the most important being that you will have more peace of mind. Not having to worry about that large monthly bill and being free of debt can make your life a lot easier. But, many times, doing the opposite and not paying off your mortgage early can be very beneficial as well. Investing that money into something else, or simply using your money for something else, can have more financial advantages than simply paying off your mortgage early. This decision largely depends on each person’s financial situation and future plans, so it is very important to understand what paying off your mortgage involves before going down that road.

Need Assistance with Mortgage Loan Modification? These Services Can Help!

Need Assistance with Mortgage Loan Modification- These Services Can Help- 150x150Owning a home is a common goal that people have during their lifetime. Unfortunately, during times of economic unrest, owning a home can turn into a nightmare if you are unable to pay your mortgage anymore. The prospect of losing your home is frightening, and it’s something that will affect you financially and emotionally for a long time. Besides having to give up your home, the whole process will have a big impact on your financial situation, making it extremely hard or even impossible for you to be able to qualify for a new mortgage in the near future.

If you find yourself in danger of losing your home, saving it from foreclosure should be your main objective, and one way you can do it is by getting your lender to agree to a mortgage loan modification. Time is of the essence here, so calling your lender as soon as you notice any signs of trouble will increase your chances of getting approved for a mortgage loan modification. Lenders are not obligated to agree to a loan modification, but they want to avoid foreclosure as much as you do, so it is important for you to make sure that a mortgage loan modification is the way for you to get back on your feet financially, or else it would just be a waste of time for both parties involved.

Do You Need Help With the Mortgage Loan Modification?

A mortgage loan modification will probably involve several long discussions with your lender, and many home owners may not have that much free time, so hiring someone to do it for them could be the right choice, in this case. The truth is that the borrower can do most, sometimes even all, of what the mortgage loan modification professional can do. The most important thing here is to pay your mortgage, so hiring someone to do something that you could do yourself, would just be a waste of money, which could be used to get you out of this situation quicker.

But some people just won’t have the spare time to deal with a mortgage loan modification, so hiring someone to do it instead makes more sense. Others may think that they don’t possess enough knowledge on the subject to deal with loan modification themselves, in which case it also makes more sense to seek help, whether it’s from a professional, a relative or a friend.

Who Can Help With a Mortgage Loan Modification?

If you think you can’t tackle pursuing a mortgage loan modification yourself, or you simply don’t have the time to deal with it, then the next logical step is to hire someone to help you with this process. One place where you can look for help is non-profit loan modification organizations. Non-profit organizations, such as the Association of Community Organizations for Reform Now (ACORN), GreenPath, National Urban League, United Way, or Catholic Charities have offices all over the United States and are qualified to work with you and assist you with the mortgage loan modification process.

Another popular option for those who can’t deal with a mortgage loan modification themselves is to hire an attorney. Attorneys who specialize in mortgage loan modifications can offer you the proper guidance and discuss with your lender on your behalf. Hiring a professional is the best way of ensuring that the process goes smoothly and that everything will be handled with the utmost care and professionalism. If hiring an attorney is too expensive for the borrower, then contacting a local counseling service could be the next best option.

A third option when seeking help with your mortgage loan modification is to hire a mortgage modification company. Many times, these types of companies will overcharge you, often upfront, and provide no guarantees for something that you could easily do on your own. You have to remember that obtaining a mortgage loan modification is in your best interest, so hiring someone to give you advice is recommended, but hiring a company to do everything will probably not produce the same results, and it will cost more.

Needing assistance with your mortgage loan modification is nothing to be ashamed about. You are, after all, trying to save your home, so any bit of help matters. But before you go out and spend money on the services of a mortgage loan modification company, try to do a little research and find out if you won’t be better off doing things yourself. Receiving help from an attorney or someone who has experience with loan modifications, especially if you don’t have enough time to do everything yourself, is also a great way of making sure that you won’t have to go through a foreclosure and lose your home.

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.