home loan

Can a Home Loan Be Paid Off Early?

If you’re a homeowner, the thought of paying your home loan off early might have crossed your mind since closing on your loan. Maybe you’ve received a raise at work and want to invest it into your home, or maybe you have a lump sum of cash you want to put toward your loan. The short answer to the question of can home loans be paid off early, is yes, but make sure to read the fine print. Here are some points to be aware of before you choose to pay your loan off early.

Can a Home Loan Be Paid Off Early?

How is my mortgage payment broken down?

Your mortgage payment is comprised of two parts: the principal and the interest (also known as P&I). The principal is the section that builds home equity and reduces the amount of the loan that you owe. The interest is what your lender charges you for borrowing the money. Paying off your loan early can help you save on interest, but there could be possible penalties.

Prepayment penalties

To clarify, signing up for a 15-year vs. 30-year mortgage, is not the same as paying off your mortgage early. That is simply choosing a shorter term to pay your mortgage with higher monthly payments over less time. Paying your mortgage early means that you’ve decided to pay off your loan in a faster time frame than you originally planned. It’s important to do research on the loan you’ve signed up for. You could have agreed to a prepayment penalty when you first closed on your loan. So make sure to talk with your lender to see where you stand and discuss any prepayment penalties. Not all mortgages have prepayment penalties, but if you are signed up for a loan that does, it can be a hefty charge and it’s good to know your options before making a poor financial decision.

How do lenders charge interest?

Lenders will calculate the monthly payment that allows for just the right amount to go to interest vs. principal to pay off the loan at the end of the term. If you have a conventional loan, your interest rate won’t change throughout the life of your home loan. If you have an adjustable rate home loan, you’re able to refinance into a new rate after a certain number of years, dependent on your loan type. With a conventional home loan, over time, more of the monthly mortgage payment will go toward the principal rather than the interest.

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