Dos and Don’ts When Paying Down a Mortgage

Most homeowners dream of the day they make that final mortgage payment and own their home free and clear. As mortgage professionals we often get questions about how our clients can pay off their mortgage sooner and not have to wait a full thirty years or more for that exciting day. Here are some tips for counseling your borrowers who are interested in paying down their home loans.

Let’s start with some things to do, and then we’ll move on to actions to avoid.

• Do check the terms of your loan.
  Be sure that there is no pre-payment penalty or other issue that could mean they would have to pay additional fees for paying the loan down, or paying it off early.
• Do look into refinancing options.
  By refinancing into a shorter term loan such as a fifteen year or ten year fixed rate mortgage your borrower could pay their home off years sooner and potentially lower their interest rate as well. The monthly payment will be higher, but if that is affordable the interest savings can be extremely substantial.
• Do make it automatic.
  Some homeowners who want to pay down their mortgage take the approach of waiting until the end of the month and applying any funds left over after everything else is taken care of towards the principal balance on the home loan. This is tough because money has a way of getting spent on other things before the end of the month rolls around.Instead, if it’s affordable and won’t cause a financial hardship, suggest that your borrowers include an additional amount towards principal with each monthly mortgage payment. With it simply gone from the bank account it’s likely to not be missed. These funds won’t be spend on other things and even small additional payments will add up over time.
• Do remember taxes and insurance.
  When it does come time to pay off the mortgage in full it’s important that the homeowners are aware that they will now be responsible for handling the payments for their real estate taxes and homeowners insurance. Many mortgage servicers take care of this by collecting the funds needed to cover these expenses as part of the monthly mortgage payment and paying the bills when they are due. The homeowners should contact their local municipality and homeowners insurance company to be sure that the bills are sent directly to them from now on.
  

Now we’ll address some of the things your clients should not do when working towards paying down a mortgage.

• Don’t pay more than you can afford.
  Paying down a mortgage balance can result in extremely appealing interest savings, but it’s important that the extra payments are manageable. It could be financially detrimental if the higher payment means that there isn’t enough for the household budget or adequate emergency and retirement savings.
• Don’t just assume paying down the mortgage is the best financial move.
  Aggressively paying down a home loan with an extremely low interest rate may not be the best use of additional funds. There may be other investments that can grow that money at a higher rate than is being paid on the mortgage. Of course only your clients can decide what level of risk they are comfortable with, and no one can predict what will happen in the market in the future, but if this is something they are interested in you might suggest they speak to a financial advisor to explore their options.

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