Home Ownership Mortgage prepayment is a complicated subject and consumers may not take full advantage of all options open to them. Prepayment allows you to make payments on the mortgage other than the monthly payment. Taking advantage of this right, especially in the early years of a mortgage, has dramatic effects in reducing interest costs.

One-year or two-year mortgages are more prevalent than mortgages with terms of five years or more. This changes the face of the prepayment debate because at the end of the term any mortgage becomes fully open. At the end of each term, you can prepay the whole amount or any part without penalty.

Unfortunately, few mortgages contain an obligation by the lender to renew. The risk is that at the end of a term, the mortgage won't be renewed. You might not be able to refinance if interest rates rise, although most lenders will renew mortgages with qualified borrowers who have sufficient equity.

Consumers usually opt for institutional mortgages but two other options are private mortgages and vendor take-back mortgages. Most institutional first mortgages have some form of limited prepayment privilege, usually up to 10 per cent. Mortgages with private lenders are often hybrid — permitting prepayment after a specified period. Mortgages with a term of more than five years are, by law, open after five years on payment of three months' interest. You'll pay a premium for an open mortgage, typically half a per cent per annum. Unless you have specific plans to use the prepayment privilege it may be a luxury that is never invoked.




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Home > Home Ownership > Finance And Security > Prepayment Pros And Cons

December 4, 2008