Mortgage prepayment myths that prevents many homeowners from saving thousands

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By: tiarajoseph11
on 22nd Apr,2015

Mortgage prepayment option is known to everyone. But still we don't have enough knowledge to admit it properly.
Mortgage prepayment myths that prevents many homeowners from saving thousands


Mortgage prepayment option is known to everyone. But still we don't have enough knowledge to admit it properly. We have a misconception that making pre-payment is not worth a try. Is it really true? If you are not sure, then let's check out the truth behind those pre-payment myths and reveal them.

MYTH 1: It's not a genuine thing

TRUTH: Surely, it sounds too good to be true when it shows the big picture of saving your $14,000 or more by just paying little more as monthly payment. Probably it's a fake thing to consider. Most of the people are being warned to stay back from this kind of payments.

But actually, the more you'll invest in your mortgage, it will give you a good amount of reward most of the time. The point is, if you want to save more, you'll need to pay more as well. For example, If your loan amount is $140,000 and you'll pay $50 more in every month, you can achieve the goal of saving money over $30,000.

MYTH 2: It's not affordable

TRUTH: I totally disagree. If you have a loan of $140,000 for 30 years (rate of interest 6.5%) and you choose to put 25 cents a day more, you'd be paying $7.50 per month extra. That would save you nearly about $5500. You must give this a trial for starting a prepayment habit. Adjust your priorities and tend to save little now to save more in the future. Use your resources, when you have the opportunity to turn your mortgage debts into long term savings.

MYTH 3: Prepayment causes penalty

TRUTH: Yes, there are prepayment penalties. But they are very rare, and applied only during the first couple of years. When as a borrower, if you will try to pay off your new mortgage or home equity loan fully, only then the pre-payment penalty will be implied to you. As an exception, if you are penalized for making small payments, the amount of penalty will also be very little to bear. For collecting that small amount, the lender would also have to spend much more, which is not profitable for them. So, many banks don't bother to collect them literally.

MYTH 4: The bank will create problems

TRUTH: Oh no....not at all. A commercial bank don't have any feelings that it will get angry with you. For a lender bank, the prime income comes through by selling points or charging the closing cost. If you make regular pre-payments, the bank will accumulate all your pre-paid money and open up new possibilities for new borrowers. They will create new loans and turn over your money to earn profit. So, it's a win-win situation for both of you.

MYTH 5: The process is much complicated

TRUTH: You don't have to worry! With user friendly sophisticated computerized systems, maintaining huge loan account is a piece of cake! The lenders will take care of your prepayments and credit them in proper account correctly. All required data will be maintained by the lender and you'll get regular updates. The bank will automatically adjust your loan principal amount according to your pre-payment. They will deduct the amount from your outstanding loan balance and your total interest will be gradually reduced. For avoiding confusion during payments, you can pick up a round figure as a monthly installment. Suppose you have to pay monthly $775.80 towards your loan. To recall the amount every month correctly and ease up signing checks, you can make the installment of $800 per month.

If you can maintain your good habit of pre-paying extra with regular installments, you'll end up having your own house totally free and clear way before you have expected, along with a good credit history.

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