How can you pay off your mortgage ahead of schedule?
If the borrower decides on early repayment of the mortgage, then he needs to study this issue in detail so that in the future he does not have to face possible troubles and additional expenses.
In this article, we will consider in detail: the actions that need to be taken by a borrower who wants to repay a mortgage ahead of schedule; pitfalls that the borrower may face.
Options for early repayment of the mortgage, depending on the lending system
The ability to pay off the mortgage debt before the term specified in the agreement is directly related to the lending system used in your particular case. The point is that today one of the following options can be used:
- The amount will be calculated in annuity payments. What is an annuity? This is a way of paying off a debt, in which the installments are equal throughout the life of the loan. This method has its own drawback: at the initial stage (and with a mortgage loan, this is the first few years), the borrower does not actually repay the loan body (the principal amount), but gives the financial institution only interest for its use. This mechanism of mortgage lending is beneficial for credit institutions, since the bank minimizes its own risks and gets the maximum profit.
- Differentiated payments. This mechanism provides for the introduction of an equal amount of the debt and This scheme is beneficial, of course, for the borrower, but at the initial stage, the costs will be impressive. The point is that due to the increasing risks of the bank along with the risk of not receiving maximum profit, at first the monthly payment will be much higher than with annuity payments. After some time, the size of the payment will decrease, and, as a result, it will become easier for the family budget.
Methods of depositing funds in case of early repayment of a mortgage loan
You can repay the mortgage loan ahead of schedule, using one of the ways:
- Completely close the amount of debt obligations.
- Deposit funds that will cover a certain part of the principal debt.
If you opted for the first option, then you have the opportunity to fully repay the mortgage. But here one condition must be met - for the current month of using the loan, interest must be paid. The rest of the interest will be automatically recalculated and reset to zero.
If you chose the second repayment option, then the profitability of the investment will be related to the type of settlement specified in the debtor's mortgage agreement.
Benefits of a differentiated settlement scheme for early repayment of a mortgage
We have already said that the benefit of the borrower in case of early repayment is directly related to the settlement system provided for in the mortgage agreement.
If we are talking about a differentiated settlement system, then the repayment of the mortgage before the appointed date is a benefit at any stage of lending, both in parts and in full. The fact is that if the borrower decides to "close" the mortgage in full, for example, 3 years after the signing of the agreement, then he has not yet had time to repay the impressive amount of interest on the loan, while proportionally reducing the amount of the principal debt. Therefore, you need to pay less to pay off the principal debt, and the overpayment will not be so significant. A similar situation will occur when using credit funds for 10 years. The main debt will be much less, and the amount of interest on the loan will be impressive.
If you repay the loan partially, then the amount of the principal debt will be less, which allows you to reduce the amount of the obligatory monthly payment. Interest on the loan will already be accrued on the amount of debt that remains, and this makes it possible to reduce the contribution as it is repaid.
Early repayment of a mortgage for annuity payments
In this situation, the obvious benefit is not so noticeable, although it is profitable to extinguish ahead of schedule in any case. As mentioned above, with this method of repayment at the initial stage, the bank charges impressive interest, and the amount of the principal debt decreases insignificantly. After that, the borrower begins to repay the amount that was actually taken.
So, it turns out that in that period of time when the borrower decided to repay the loan ahead of schedule, he has already given such an interest on the loan to a financial and credit institution that the actual difference, whether he will repay the mortgage on time or ahead of schedule, will be insignificant.
But if the debtor still makes a decision repay the mortgage loan ahead of schedule, then it will be the responsibility of the bank to recalculate, and after that, events can develop in 2 directions:
- The client retains the previously established mortgage term, but his payments once a month become less.
- The loan term is shortened, but the amount of monthly installments remains unchanged.
Property or debt insurance for early repayment of a mortgage
Mortgage programs in most cases have a prerequisite that is the subject of a mortgage, or debt under a loan agreement. Sometimes it happens that two types of insurance are required.
If the amount of the debt is repaid in full, then you can demand from the insurance company to recalculate the cost of insurance for the loan. If you also have an insurance contract concluded for an apartment, then you have the right to early termination, but at the same time it is imperative to fulfill all the conditions provided for by the insurance contract.
As a rule, we are talking about the payment of a small amount of a penalty or a certain share of the required insurance premium. One way or another, if the borrower refuses insurance or makes a requirement to recalculate its cost, the savings in his money will be obvious.
Refinancing for early repayment of a mortgage loan
There is another way to change the way mortgage lending is to start the procedure in another financial institution. The borrower can at any time become a client of another bank in order to reissue the mortgage on more favorable terms for himself. This makes it possible to change the interest rate, loan term, method of calculating payments (from differentiated to annuity and vice versa), etc.
We draw your attention to the fact that if you change the creditor bank, the encumbrance will not be removed from the property. In other words, the apartment is transferred from the mortgage in the previous bank to the mortgage in another financial institution.
If the borrower has a need, for example, to exchange, sell or donate an apartment without additional problems, and the principal amount is not more than 1,500,000 rubles, that is, a way out of the situation is to issue a consumer loan. Taking into account the existing mortgages, you can take out a loan only if guaranteed by third parties or other property is pledged as collateral (for example, it can be an expensive car).
How to deposit money early to pay off a mortgage
In order to deposit money ahead of schedule, you need to notify the bank that the payment is planned. As a rule, the period for consideration of such an application does not exceed 30 calendar days. To have complete information, you need to contact the bank in advance and find out important nuances.
On the agreed day, the borrower must come to the bank and deposit the funds indicated in the application and reissue the documents. If you decide repay the mortgage loan ahead of schedule, then you will need to develop a new payment schedule or recalculate the amount required to pay. If you repaid the mortgage in full, then take a certificate from the bank that your obligations have terminated and terminated. Issuing such a certificate may take some time, but it will allow you to avoid a number of difficulties in the future. You may have to pay a certain amount for it.
When all the funds have been deposited, you become the owner of the real estate, or are one more step closer to the cherished goal.
Important information regarding early repayment of mortgages
1. The procedure for depositing the required amounts before the appointed date will be considered at the time of the conclusion of the mortgage agreement and the borrower is offered several options. You should familiarize yourself with them in detail, analyze and opt for the most acceptable option.
2. In Art. 809 and 810 of the Civil Code of the Russian Federation, changes were made, according to which banks no longer HAVE the right to collect penalties, levy fines, or not allow the client to repay the mortgage before the appointed date. In addition, interest can only be accrued up to the day when the debtor actually used the borrowed funds.
3. Pay close attention to the paragraph on early repayment of the loan and on the responsibility of the parties. It may contain penalties for the fact that the borrower has contributed excess funds within the time period specified in the application. Also, there can be set a minimum amount that is allowed before early payment.