Prepay Mortgage Loans: Good or Bad?
In very simple terms, there are two types of bi-weekly prepay mortgage plans: those that charge fees for this service and those that do not charge fees. In both cases, they do, indeed, lower the amount of interest that you will have to pay on your mortgage loan, but is paying fees for this service a good idea?
If you do the math on bi-weekly payments you discover that you end up paying what amounts to 13 monthly payments in the course of a single year. Some months have more than four weeks, which accounts for the result. For those homeowners who have the money to do so, this is a great way to pay down on the mortgage loan. but do you really need to pay a fee for doing this?
The answer to that question is no. The truth is most lenders allow for prepayments on mortgage loans with no fees assessed for that purpose.
According to Richard Egan, a certified financial planner at Buckman, Buckman & Reid: “Assuming your lender does allow prepayment, you can either add a bit extra to your payment each month, send in two payments a month, or just send in some extra money at the end of the year.”
When sending in your payment you should add a note stating that the amount is to be applied to the principal of the loan. If you do not do this, the amount might be mistakenly applied as a future payment.
Consumers should be careful about using third-party agencies for pre-payments on mortgage loans. Some of these companies will charge an up-front fee and that amount might be in the hundreds of dollars. In addition to the fee, some will also want to bill you on a monthly basis. The monthly payment to them might only be ten dollars or so, but, still, why pay that when you may not have to? Another issue that consumers should at least think about is whether or not the money used to help pre-pay the mortgage loan would not be better used to pay down on outstanding credit cards or other loans. In some cases, paying down on the higher interest rate credit card is a more worthwhile effort in overall financial health.