Homeowners not yet directly threatened by repo houses are being advised by financial consultants to consider making prepayments to cut total payments by thousands of dollars and to further move away from the threat of repo houses.
Prepayment is especially advised for homeowners who have funds to spare and who are not yet burdened by educational expenses and other types of expenses.
Prepayment will increase home equity more quickly and will ensure a more relaxed financial situation in later years.
Prepayment will also reduce the risk of having homes turned into repo houses in years when income is reduced or expenses are substantially increased.
One way to prepay a home loan is paying 50 percent of one’s monthly payment every two weeks. Since 52 weeks comprise one year, the prepaying borrower will be able to pay in one year an amount equivalent to 13 months of payment.
Mortgage consultants say that a borrower who has a home loan of $150,000 with a term of 30 years and a mortgage rate of 5.6 percent would be able to pay his total home loan within 25 years if he prepays using the biweekly plan. The borrower would be able to save over $30,000 in total finance charges as the principal is paid off at a much faster rate. Instead of wallowing in worries about repo houses, the borrower rejoices in the fruits of his sacrifices.
Another form of prepaying is opting for a 15-year home loan payment plan rather than a 30-year payment plan. Many borrowers think that 15-year home loans are heavy to bear because monthly payments for a 15-year term would be double the monthly payments for a term of 30 years.
In reality, monthly payments for a 15-year term would only be higher by about 40 percent than monthly payments for a term of 30 years because rates for shorter terms are lower and the principal is paid off a lot faster in shorter-term loans.
A borrower who has a $150,000 home loan would pay about $861 monthly if he chooses a 30-year term. His total interest payments would reach $160,003. If he chooses a 15-year term, he would pay about $1,210, higher by only around 40 percent than the monthly payment for a term of 30 years. He would also save $92,245 in total finance charges.
Lastly, there are private enterprises that offer to negotiate a prepayment plan with lenders in behalf of borrowers. Borrowers need to be careful about these companies because instead of helping, they can accelerate the conversion of homes into repo houses.
