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Pre-Payment Options Explained



For many clients Pre-Payment Options is a very important aspect of their mortgage. They would like to know if they can make lump sum payments toward the principal debt without paying penalties, and though you might think that financial institutions will be happy to have a client that can do this, the opposite is true.

Financial Institutions loose a substantial amount in interest if you can pay down your mortgage sooner than the contracted 25 years.

There are a few different pre-payment options available, but it varies greatly from financial institution to financial institution.

Monthly pre payment options.

You usually have the option to repay up to a certain percentage, (usually between 10% and 20%) of your monthly payment in addition to your payment. This extra amount will be applied to your outstanding principal and not toward interest. This means that your outstanding principal amount will be reduced faster than if you did not make any additional payments.

Double Up.

Most financial institutions also have the option to double up. What this means is that you have to option to make a double monthly payment once during the year. So if your mortgage payment is $1,000.00 per month, once a year you have the option to make a $2,000.00 payment and the extra $1,000.00 will be applied toward your principal.

A very select few Financial institutions give you the option to double up each mortgage payment that you make. If this option is important to you, please address it with your mortgage professional prior to submitting your application for approval.

Lump Sum.
You will also have the option to repay 10% to 20% (Depending on the guidelines of your financial institution)of your initial principal on the anniversary date of your mortgage in a lump sum.

What this means is, say you have a mortgage of $100,000.00 and your first payment was on February 1, 2006. With this pre-payment option you can repay $10,000.00 to $20,000.00 (Depending on your lender) in addition to your monthly payment on February 1, 2007. This whole amount will be applied toward your principal.

You do not have to utilize the full allowed pre payment amount, you can pre-pay 5% or whatever you want up to and including the percentage allocated by your lender.

Some financial institutions offer the possibility to skip one payment during the year. This payment will then be added to the end of your term. This is a very good option to have built into your mortgage for unforeseen situations, like an unforeseen job loss, or illness.

This option is not cumulative, which means if you do not use it during the year, you cannot transfer it to the next year and skip two payments. If this is a benefit that you would like to have in your mortgage please advise your mortgage specialist ahead of time, as not every financial institution has this benefit.

We trust that you find this information helpful in determining the pre-payment options that are important to your needs.

Your Pre-payment options, together with your montly payment plan, are two very important components in choosing a mortgage that is right for you.

Make sure that you are familiar with all the options available to you, before making a final decision.

To speak to one of our professionals, please contact us for a free, personal and no-obligation consultation.

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