Many first-time homebuyers often wonder, ‘Can I make early mortgage payments?’ The answer is simple: yes, you certainly can. However, while early payments can offer peace of mind and greater financial flexibility, there are essential factors to consider before doing so.
Check for prepayment penalties
Some mortgage lenders may charge you a fee if you pay off your loan before the end of the term, often referred to as a prepayment penalty. It can vary depending on the type and amount of your loan. You should check with your lender if there is any prepayment penalty for your mortgage and how much it would cost you to pay it off early. You can also look at your loan documents for more accurate information about prepayment penalties.
Make extra payments toward the principal
Another factor in paying off your mortgage faster is making extra payments toward your loan’s principal balance. For example, if you have a 30-year mortgage of $200,000 with an interest rate of 4%, an extra payment of $100 per month could potentially save you nearly $24,000 in interest over the life of the loan and allow you to pay off the loan earlier.
Refinance to a lower rate or shorter-term
You could speed up your mortgage payoff by refinancing your loan for a reduced interest rate or a shorter term. This refinancing action means switching out your present loan for a new one with terms that suit you better. This could mean a lower interest rate and reducing your monthly payments and total interest paid. A shorter term could also shorten the loan payoff while cutting down interest costs. However, it’s important to note that refinancing often comes with various expenses, such as closing costs and fees.
Weighing the pros and cons
Before proceeding with making early payments, it’s crucial to weigh costs against the potential benefits. Yes, paying off your mortgage early has its advantages. But it also means a lot of your cash is tied up in your home, which could make cash accessibility difficult. Like all big money decisions, you may need to weigh the good against the costs, including prepayment penalties.
Your best choice must be the most informed one that fits your life and financial goals.