When negotiating for the terms of a home loan in Lake Dallas, Highland Village, and Justin, many of us do everything in our power to lower the monthly payments. Doing so is not necessarily wise, though, for it does not save us money. It might even create an illusion that a bad deal is better than others.
Nevertheless, a smaller mortgage payment can make your financial obligation more manageable. It can help you build your credit much faster and more steadily because you are less likely to underpay or miss a payment when your bill is not that big.
However, many people try to negotiate for a smaller monthly mortgage payment only to pay extra regularly. This strategy might seem strange, but it is worth pondering for different reasons.
Rapid Home Equity Growth
Paying more than you are supposed to every month can help shrink your loan principal more quickly. As a result, it can accelerate home equity growth.
To understand why this is the case, you should wrap your mind around mortgage amortization. In a regular 30-year fixed-rate mortgage, the size of monthly payments is identical throughout the entire term. However, the more significant portion of the old ones goes toward the interest. Therefore, it takes a lot of time before the principal is decreased.
Since this is how mortgage amortization is structured, making extra payments that directly apply to the principal balance can boost your actual ownership of your house.
In case property values in your area plummet in the future, having a lot of home equity can keep your mortgage above the water. If you sell your house before your loan’s maturity, you can pocket more money out of the deal.
Furthermore, sufficient home equity can bring you more credit opportunities in the future. Since it is an asset, albeit illiquid, you can convert it into cash when you refinance your mortgage or take out a home equity loan or a home equity line of credit down the road.
Usually, equity-backed financing options come with little restrictions. More often than not, you can use the money for whatever purpose you desire.
If you plan to stay in your house until retirement, making small regular extra payments or occasional but large ones can render your property free and clear when you reach your sunset years.
When refinancing is not feasible or viable, putting your excess cash in your house is your next best option to shorten the term of your loan.
Reduced Total Interest
As mentioned, extra payments can minimize the total amount of interest you have to shoulder for taking out a mortgage. The interest decreases as the principal does, so you can save a ton of money when you pay off your loan early.
Realize that your mortgage contrary might include a prepayment penalty to discourage premature repayment. The size and mechanics of a prepayment penalty can vary from lender to lender. But this fee is often equivalent to 80% of six months’ worth of interest. It can set you back thousands of dollars, so do the math before paying down your mortgage over a certain period too much.
There are different methods to prepay your mortgage, although one can be more effective than the other. Nevertheless, familiarize yourself with the drawbacks of prepayment as much as its benefits to calculate the risks accordingly.