Prepayment privilege
This is a very important feature to have in your mortgage if it is a
closed
mortgage. If it is an open mortgage, you can pay in part or in full the
balance outstanding on the mortgage at any time without penalty. If, on the
other hand, you have a closed mortgage that does not have any prepayment
privileges, you are locked in for the term of the mortgage (e.g., 3 years)
without the privilege of prepaying without penalty.
You may, therefore, wish to have a mortgage that, although called a
closed mortgage, is in fact partly open and partly closed, permitting
prepayment at certain stages and in a certain manner, but not at other times. Here
is an example of the types of options to examine:
- Annual Payment. You may be permitted to make a prepayment of between 10% and
20% annually on the principal or original amount outstanding, depending on the
terms of your mortgage. This could be made once a year on the anniversary date
of the mortgage, or at any time in that year, depending on the terms of your
mortgage. You can see the benefit of being able to pay any time in the year. You
would save money by paying a lump sum when you had the money. Also, if you were
paying out the mortgage and going to suffer a penalty, you could reduce that
penalty by paying your prepayment amount maximum before paying out the mortgage.
You can also see the benefit of being able to prepay based on the original (face
amount) of the mortgage rather than on the declining balance.
- Increase regular payment. Another variation would also give you the option
of increasing the amount of your regular monthly or other payment (e.g., weekly,
bi-weekly, semi-monthly) payment by 10% to 20% once a year, or at any time in the year. You can see
the incredible difference this would make in terms of saving on
interest and reducing the amortization period. Every time a
prepayment is made, or every time you increase your monthly payments,
the balance owing and thus the monthly cost of interest should be
reduced. The net effect is that a larger portion of each payment
will be applied toward the principal, since monthly (or other
agreed-upon regular) payments usually remain the same. Make sure
that you completely understand your prepayment options, as they
could save you a lot of money. There is a considerable variance
between lenders in regards to mortgage terms.
In summary, you may want to have it all: the option to pay up to 20% any time
in that year, rather than waiting for the anniversary date of the mortgage; to
have the prepayment amount based on the original amount of the mortgage, not the
outstanding principal at the time; and to be also able to increase your monthly
payments by up to 20% at any time in the year,
not just to wait until the anniversary date.
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