Mortgage payments are simply part of owning a home, which we all know.
Paying them down sooner than later, however, may have some advantages if you opt for a 30-year mortgage and pay it down early.
Today, we discuss why paying a mortgage early pays off in the end and why equity is a homeowner’s best friend.
Mortgage Terms and Re-Amortization
As your clients begin their hunt for a home, they’re given options from lenders for different mortgage products. There are 15-year, 20-year, and 30-year mortgages to consider.
One of the reasons a 30-year mortgage is so attractive is that it offers lower payments but can be re-amortized later to create a shorter mortgage period. If they chose a 15-year option, for example, their payments would be higher.
If a borrower chooses a 30-year mortgage but decides they want to pay it in 15 years, all they need to do is to run an amortization schedule and pay on the loan as if it were a 15-year loan. If taxes or insurance increase, if there is a cash flow problem, the worst case would be that the borrower would pay according to the 30-year term instead of the increased payment.
This method of mortgage manipulation also pays your balance down earlier than anticipated. Paying early creates equity in your home.
Re-amortization is the act of paying directly to the principal balance of a mortgage. By creating equity in the property, in the event that the borrower has taken on a Home Equity Line of Credit (HELOC) as well, the second lender won’t feel that they are insecure so that at the end of the term of the HELOC they call the loan or refuse to extend or refinance it.
Paying Down a Mortgage to Create Equity
Building equity in a property is smart. It offers a nest egg if you ever find yourself at the mercy of a lender. The equity can be transformed into cash in a variety of ways, including:
- Home equity line of credit
- Cash sale
- Reverse mortgage (Age 62 and up)
Paying down a property early also gives your clients more control over when and how to sell. During the COVID-19 pandemic, the housing market spiked. Many Americans sold their homes at peak prices. Now, the markets are settling back to more normal prices. People who have equity in their homes have more options when it comes to relocating or downsizing because they have a downpayment for their next transaction.
If you run an amortization schedule on your loan, you can see how many thousands if not tens of thousands of dollars you can save over the life of the loan. With interest rates doubled over what they were a year ago, the impact is even greater over the life of the loan.
Investing In Your Home
Unlike the stock market, which is almost always volatile, home investments are rarely so. We did see it spike and settle during the pandemic, but this year offers a calmer sense of stability in the market.
In a way, paying down a mortgage early and drawing on home equity turns your home into a bank. It almost puts you in the lender’s seat. You’re using the money you accrued by paying down your mortgage to finance things you need, including:
- University payments
- Starting a new business
For mortgage brokers, having a real estate lawyer on call is beneficial during mortgage choosing time. Real estate lawyers understand the ebb and flow of the current local housing market and the red tape and legal roadblocks along the way.