Prepayment Privilege

It is absolutely essential for a borrower having a closed mortgage to include the prepayment privilege or the advantage to forestall payments in the mortgage agreement. An open mortgage permits the borrower to repay the unpaid loan amount at a time convenient to him or her without having to pay any monetary fine on the interest. However, if a person has a closed mortgage without the prepayment privilege, the borrower is bound to continue the loan for the entire mortgage term, which may be fixed period of three or five years. Moreover, the borrower is deprived of the advantage of making the payments at any time without having to pay a fine on the interest amount.

Hence, most people prefer a mortgage that includes some features of both - an open mortgage and a closed mortgage. Having a mortgage that is partly open and partly closed enables the borrower to make prepayments at specific periods and in specific ways. However, this kind of mortgage does not permit the borrower to make payments at any time as is the case with open mortgages. Two specific types or choices of payments are discussed in brief below and you may find them useful.

Annual payment

Under this provision a borrower is allowed to make a prepayment or forestallment of around 10 per cent to 20 per cent of on the principal or the prime unpaid amount each year according to the conditions mentioned in his or her mortgage agreement. In this case, the borrower has the advantage of making the prepayment either at the end of a fiscal year since the mortgage was availed or at any other time as per the conditions laid down in the agreement. The advantage of being able to pay at any time of the year convenient to the borrower means that he or she is able to put aside some cash by making a single payment of the total amount or principal every year. Moreover, in the instance of a borrower making a mortgage payment and still having to pay a fine on the interest, he or she is able to lessen the penalization by paying a maximum prepayment amount prior to retiring the mortgage. Actually, this annual payment procedure also benefits the borrower as he or she will be making the prepayments on the original principal and not on the diminishing outstanding balance amount.

Augment regular payments

Here is another option for making the prepayments and this is equally advantageous for the borrower. If the borrower does not wish to make a lump sum prepayment on a yearly basis, he or she may choose to augment the regular payments, whether being made on a monthly, weekly, bi-weekly or semi-monthly basis, by anything between 10 per cent and 20 per cent each time. Adopting this procedure will bring immediate results and the borrower will be able to make out the amazing change in savings this would produce vis-à-vis the interest on the loan and also in lessening the mortgage amortization period. It is obvious that each prepayment or an increase in the monthly or other periodic payments will go a long way in plummeting the outstanding principal loan amount as well as the monthly interest fee on the mortgage. In effect, any increase in the regular payments, made each month or on any other periods depending on the mortgage agreement will only go a long way towards lessening the outstanding principal amount as all other regular payments usually remain identical. It is essential that the borrower actually comprehends the different choices of making prepayments as this would eventually help him or her to make substantial financial gains or savings. However, it must be borne in mind that as far as the lenders are concerned, there is a significant difference regarding the mortgage terms and conditions offered by them to the borrowers.

Before we wrap up the topic, it is evident that any borrower would like to avail all the facilities of the prepayment options available. Although it is not possible for a borrower to enjoy all the benefits of prepayment privilege, he or she would certainly like to avail the choice to make a payment up to 20 per cent at any time convenient to them in a year instead of hanging on for the mortgage anniversary and also to make the prepayment or forestallment on the principal or the original amount borrowed and not on the unpaid principal amount at a specific period of time. At the same time, the borrower would also prefer to avail the facility to increase the regular payments every month, every week or bi-weekly instead of lingering the payments till the mortgage anniversary.

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