After the application of a home loan, you will receive two documents, a loan estimate, and closing disclosure. On the surface, these documents are identical but they both serve slightly different purposes. Up Next: Expenses To Expect In The First Year Of Homeownership Here is what you need to know about the differences between these […]
Advising Homeowners: Prepaying Mortgage Principal vs. Interest
As a loan officer you will be answering many questions your borrowers may have. These questions may include prepayment for their Kansas City mortgage and how it affects their payments and financing. As their loan officer, you must be able to relate the correct information to them so they can make an educated, informed decision.
Paying Down Mortgage Principal
The objective of prepaying your mortgage is to pay off a loan sooner by shortening the term, and to save on interest. The quicker a loan is paid off, the sooner a borrower can stop making monthly payments.
Additional principal payments are the best way to pay down Kansas City mortgages faster. Making payments that are applied to interest simply pays off some of the interest borrowers have already accrued. It does not decrease the amount time of a borrower’s loan term. It also does not help decrease the interest they will have to pay in the future.
One way your borrower can save money by prepaying interest is by paying points at the time of their loan closing. In doing so, they will decrease their actual interest rate. This reduced rate will affect their overall monthly mortgage payment for the life of the loan.
Applying Additional Payments
Some borrowers believe that if they send in additional payments to their lender, the lender will automatically apply their payment to the principal. However, this belief is a misconception. Lenders need to be informed that the payment is meant to be applied towards their mortgage principal, not just towards the outstanding balance.
The outstanding balance may include interest that also needs to be paid off. Make sure your borrowers are aware that they must let you know how to apply their additional payments before they start to make their payments. Having this information beforehand will help ensure your borrower does not mistakenly pay off interest instead of their mortgage principal.