Is There a Penalty for Paying Off Your Mortgage Early?

a penalty for paying off your mortgage that sounds insane right what bank wouldn't want you to pay off your mortgage early they get their money early and you aren't at risk of default for them any longer well there is a reason it's called interest banks are in the business to make money so when you pay off your mortgage early you eat into that interest in other words you cost the bank money if you pay your mortgage off early fortunately there are ways around the prepayment penalty plus not every mortgage has one especially since the dodd-frank act changed things a little bit in this video we'll discuss what a prepayment penalty is and how to find out if you'll be charged one and if it makes sense for you to pay off your mortgage early at all hey everyone this is andy hill from marriage kids and money a channel dedicated to helping you strengthen your family tree and live financially free if you like what you hear today please consider giving me the youtube triple thanks that's hitting the like button subscribing to the channel and then commenting down below thanks so much okay what is a prepayment penalty a prepayment penalty is a charge some lenders require if you pay off your mortgage before a specified date most penalties are for the first three years of your loan but every lender is different the prepayment penalty prevents borrowers from paying off all or a large part of their mortgage lenders would prefer you to pay the loan back slowly and steadily because this accrues more interest aka profit for the bank the dodd-frank act of 2010 the new mortgage regulation guidelines that makes it more difficult for lenders to charge prepayment penalties lenders that charge prepayment penalties cannot make them for more than three years lenders cannot charge more than two percent in the first two years and more than one percent in year three it makes sense really banks want to make money it's how they stay in the business of loaning money to buy homes but what's the difference if you pay off your loan in two years versus making regular payments well lenders take a significant risk when you first borrow money from them let's say you put down 5 on a 300 000 home the bank lends you 285 000 and you invest just 15 000 of it the bank is on the losing end of the deal right normally they'd need to charge a hefty interest rate to compensate for this risk what if you stop making payments after just six months you'll have barely touched the principal at this point which leaves the bank with a major loss with a prepayment penalty they give you a much more affordable interest rate and ensure they still make money on the loan if you paid the loan off early you may have to pay a penalty for the interest they'd lose you're probably wondering at this point does every payment incur a penalty to pay off your mortgage early in other words if you pay an extra 200 towards your principal for a couple of months will you pay a prepayment penalty fortunately the answer is no most lenders allow you to pay as much as 20 percent extra periodically without penalty they aren't worried if you pay a few extra hundred dollars towards your principal while it knocks your principal balance down a little faster it only reduces your term by a couple of years lenders lose the most when you refinance after a year or two or sell the home right away this is when the prepayment penalties are the most prevalent how much do lenders charge for a prepayment penalty you might be asking well like interest rates and closing costs lenders charge different amounts for the prepayment penalty here are some of the models they might follow model number one pay a certain number of months in interest lenders may choose a certain number of months of interest they want you to pay if you pay the loan off early for example they might charge 12 months of interest if you pay your loan off in the first year six months if you pay it off in the second year and three months if you pay it off in the third year and then model two pay a percentage of the loan amount lenders may also choose to charge you a percentage of your loan amount if you pay the loan off early for example they may charge two to three percent of the loan amount if you pay it off within the specified time let's talk about how to find out if your mortgage has a prepayment penalty this is a good question the easiest way to tell if your mortgage has a prepayment penalty is to look on page one of the loan estimate every lender must send you a loan estimate within three business days of applying for the loan on page one you'll see a section that states prepayment penalty and then yes or no if it's yes it will also state how much you'll pay if you pay the loan off early the bigger question is if there is a penalty for paying off your mortgage early does it make sense to do so well let's consider these questions question one can you get a better return on your investment elsewhere before paying off your mortgage early consider where else you could invest the funds depending on your time horizon for investing you might find that you make more investing in your home than other investment options so do the math and the research to be sure don't just assume your money is best spent on your mortgage make sure of it because once you pay off your mortgage there's no turning back unless you sell the home question two do you have an emergency fund when you pay off your mortgage early you tie up your money in your home you can't easily liquidate it because you have to sell the home to get the money this could take months or longer depending on the market and you never want to be forced into needing to sell your home to get money if you don't have an emergency fund for three to six months of expenses we wouldn't suggest paying off your mortgage early you may even want to have more money than that saved for example do you have enough to save give invest vacation or do other things you care about tying up all your money in your home may not be all it's cracked up to be if you can't do what you want with your money question three will you feel more at peace paying off your mortgage some people hate having debt hanging over their heads that is definitely me if you lose sleep at night thinking about the interest you pay on your mortgage you might feel better off without it on the flip side having your money tied up in your home might bug you more rather than paying it off slowly think about what you value the most and handle your mortgage that way if paying it off all in one lump sum worries you consider other options like bi-weekly payments that might help you pay it off gradually over time if you've decided the penalty for paying off your mortgage early is worth it or your mortgage doesn't have a prepayment penalty here are the steps to pay off your mortgage early make sure you have an emergency fund this is a really important one before tying up your money in your home make sure you have money set aside for example emergency funds cover your expenses in extreme circumstances when you can't work also consider having money set aside for home repairs car repairs and medical expenses don't just get by have enough money set aside to get you through any situation without a financial struggle to pay off your loan also max out your retirement accounts don't ignore the need to save for retirement if you haven't saved do that before paying off your mortgage if you have already started your retirement accounts max out how much you contribute the more you contribute early on the more time it has to grow and support you during retirement once you achieve coast fire or you're on that path then consider paying off your mortgage early also pay off high interest debt if you have high interest debt paid off before paying off your mortgage consumer debt interest rates are much higher than the interest you'll save paying off your mortgage don't carry high interest debt in exchange for paying off your mortgage early you'll waste more money doing it that way if you decide all the stars align and you want to pay off your mortgage i've got plenty of videos on this channel to help you make that happen in the end paying off your mortgage might seem like the holy grail of personal finance right you can proudly say you own your home free and clear i know i love saying that personally there are bragging rights in paying off your mortgage early but watch for the penalty for paying off your mortgage early that's something you want to know admittedly they aren't as common as they used to be before the housing crisis but they still do exist even if you don't have a penalty for paying off your mortgage early though it doesn't always make financial sense to do so evaluate your financial situation and ensure you're in a position to tie up your money in your home remembering it could be a long time before you can access the funds should you have an emergency well enough from our side everyone we want to hear from you is there a penalty for paying off your mortgage early is this something you've looked into on your mortgage payoff journey please let us know in the comments below this is andy hill from marriage kids and money signing off carpe diem [Music] [Applause] you

Channel: Marriage Kids and Money

Views: 3,620

Keywords: pay off mortgage early, pay off house early, pay off house early penalty, is there a penalty for paying off mortgage early, pay off mortgage early penalty, pay off mortgage penalty, pay off mortgage penalty calculator, pay off mortgage early or not, penalty for paying off mortgage early, mortgage free, mortgage free living, mortgage freedom, marriage kids and money, personal finance, finance, family finance, Andy Hill, prepayment penalty

Id: ewROXAs_hYg

Length: 9min 11sec (551 seconds)

Published: Wed Aug 24 2022