Paying Off Your Home Equity Loan Early

Paying Off Your Home Equity Loan Early

Paying Off Your Home Equity Loan Early

Many property owners who have taken housing loans have a two-part or split mortgage repayment plan. This is because they have taken home equity loans, also called a second mortgage, on their homes, in addition to their primary mortgages. If you belong to this group, you should be contemplating ways to reduce your loan burden and paying off the second mortgage early. You should look for ways in which you can pay off your debt at the earliest without attracting a large penalty.

Penalties for early pay-offs

Most lenders have a clause whereby they will penalize homeowners who pay off their secondary mortgages early. This is because they stand to lose out on earnings from interest when you choose to close your loan early. It is a good idea to read the fine print regarding such clauses before you sign the papers for your second mortgage. In case you opt for an early pay-off, some institutions have the option of freezing interest rates during a grace period in which you can pay back the balance along with the penalty.

Paying off the principal

Another way to reduce the principal of home equity loans (HEL) is to deposit into your second mortgage account any extra money you may have accumulated. The extra amount will automatically be credited and applied to the principal, helping reduce the balance outstanding and possibly reducing the number of equated monthly installments due, depending on the type of interest rate (fixed, variable etc) you have chosen to go with.

Variable rates of interest

In case you have opted for an adjustable rate mortgage, you should be aware that variable rates of interest on equity loans move in tandem with bank prime rates. This means the interest charged on your second mortgage will fluctuate over time depending on how the economy fares. When interest rates are low your monthly installment amount decreases, with the converse being true when prime rates see an upward trend. Make sure you have factored in the possibility of having to pay a higher EMI when interest rates rise. In case you cannot afford to do so, it may be best to make arrangements to repay the loan back earlier than scheduled.

Realize savings

There are obvious benefits to an early pay-off. If you choose early payment of your second mortgage, you will be free of your HEL-related debt only. However, this will free you of one loan, allowing you to concentrate on making the primary mortgage payments. While prepayment may make a large dent in your savings, imagine the huge amount of interest payments you will have saved on over the years.

Those who have taken home equity loans should keep a close watch on them. This is especially true in case you have a variable or adjustable rate loan or if you are considering an early loan pay-off. Check the fine print for prepayment clauses. In case you decide not to prepay and keep your second mortgage open, try to reduce the outstanding balance by applying any extra income to the principal amount. In this way you can manage your payments better and avoid unnecessary outflows on high interest rates.

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