Mortgage prepayment privileges.

Reduce your mortgage and your mortgage penalty.

daryl-article

You’re desperate to get out of your current mortgage, but your lender tells you that freedom has its price – you’ll have to pay a $5,000 mortgage penalty to the bank. You’re still convinced that it makes sense to switch mortgage providers, so is there a way to ease the pain?

The good news is that there’s a very straightforward way to reduce your mortgage penalty.

All you have to do is take advantage of your lump-sum prepayment privilege.

What is a lump-sum prepayment privilege?

Basically, most lenders will allow you to make some extra payments on your mortgage each year, in addition to your regular scheduled payments. These lump-sum payments are usually limited to 20% of the amount that you initially borrowed. So if the bank originally lent you $200,000 to buy your home, then each year you would have the option of paying an extra 20% of this original amount, or $40,000, towards reducing your outstanding balance. And you would not be penalized for doing so, provided that your lump-sum payments did not exceed the 20% limit each year.

Why does using your prepayment privilege help reduce your mortgage penalty?

The reason is that no matter how your mortgage penalty is calculated, the penalty always takes into account your outstanding mortgage balance. Anything you can do to reduce this balance will reduce your penalty. And the most effective way to reduce your balance is through prepayment.

If you decrease your balance by 50%, you will also decrease your penalty by 50%. For instance, if you have a balance of $80,000 and you still have the option to prepay $40,000 this year, then by prepaying this amount you will reduce your balance from $80,000 to $40,000, thus halving your penalty as well. A $5,000 penalty on an $80,000 balance will become a $2,500 penalty on a $40,000 balance.

If reducing your mortgage penalty is so straightforward, why doesn’t everyone do it?

The catch is that you need to have cash available for the lump-sum prepayment. If you’re lucky, you have extra cash that you won’t miss for a short time. Or you have friends or family that are willing to loan you the money just long enough to get the new mortgage agreement in place.

But even if you don’t have wealthy relatives to come to the rescue, there’s still a way out – you can use the services of PaylessPenalty.com. The company will lend you the cash to make the prepayment at no cost. Instead, they just split the savings on your mortgage penalty with you. So by using their services, you’re guaranteed to save money. Sound simple? It is. So long as you still have unused prepayment privileges available, you can reduce your mortgage penalty.