Home Equity Loans and Rates: Repay Your Mortgage Loan Early

Tip! Shop for the lowest annual percentage rate (APR) and closing costs. The APR is the yearly cost of a mortgage, including interest, mortgage insurance (if LTV is less than 80%), and origination fee (points), expressed as a percentage.

If you want to repay your mortgage loan early, a recent study by the Royal Bank Of Scotland (RBS) may have uncovered a possible solution.

Using the average price of properties in different areas across the country and the average homeowner income in each area, they’ve drawn up a table of the places in the UK where people pay off their mortgages in the shortest period of time.

Homeowners in Blackburn, Lancashire repaid their mortgage loan in the fastest time, while second place in the “fast mortgage” league went to Halifax, West Yorkshire.

In Scotland, Kilmarnock (which came 3rd overall in the UK) was the area where people paid off their mortgages in the shortest period. With an average house price of £100046, residents with an average wage of £19244 took 8 years 10 months to repay their mortgage.

Tip! If you are renting and are applying for a mortgage to purchase your home, you will need the names and address of your landlords for the past two years.

In contrast, Edinburgh came way down the league with residents taking an average of 18 years and 1 month to become mortgage free.

The mortgage survey, which questioned 850 homeowners in the UK also revealed that financial security was the main driving factor behind homeowners wanting to pay off their mortgage debt as quickly as possible.

Nearly 90% wanted to own their own home outright, while 40% believed that eliminating their mortgage would be a major step towards their long-term financial security.

So what’s the best way to pay off your mortgage loan early?

1) Well, using this example, a slightly radical idea might be to move to a so called “quick mortgage hotspot” area.

The average cost of houses in these areas is marginally cheaper in addition to the lower cost of living, which leaves homeowners more money to chip away at their mortgage.

Tip! Closing costs include things such as real estate transactions, attorney fees, appraisals, credit reports, prepaid interest, homeowner’s insurance, title insurance and reserves that the lender collects for future taxes and insurance.

However, if you don’t fancy living in Blackburn, Halifax or Kilmarnock, but want to repay your mortgage loan as quickly as possible, there are other options.

2) Offset Mortgages

Offset mortgages allow you to use any money that you have in a deposit/savings account to reduce (or offset) the size of your mortgage.

This gives you the double benefit of reducing the amount of interest that you pay on your mortgage (and not having to pay tax on the interest that your savings no longer earn) while leaving an easily accessible cash fund for unexpected emergencies.

An offset mortgage is an extremely attractive proposition if you have money lying around in your deposit/savings account but don’t want it tied up in the purchase of your house.

Tip! Make sure you discuss with your loan officer what goals you are trying to accomplish with this equity loan. (Your answer will dictate which type od second mortgage makes sense, ie.

In fact, this type of mortgage could help the average homeowner repay their mortgage two and a half years early.

3) A Flexible Low Cost Mortgage

One disadvantage with many offset mortgages is that the interest rate will be slightly higher than the best mortgage rates available. Oh yes, you have to pay for the great flexibility that it provides.

Tip! HELOC is an abbreviation for home equity line of credit.

For example, at the time of writing May 2006, RBS charges 5.4% for their offset mortgage (on up to 95% loan to value). But for a 25 year mortgage of £150000, you would pay more than £100 a month less with a typical 2 year discount mortgage at 4.2%.

In other words, you’d have to be a higher rate taxpayer and have more than £17000 of savings offsetting your mortgage debt before the first option would work out cheaper.

But with a flexible low cost mortgage loan, the interest you pay should be set at a more competitive level. And most lenders will allow you to overpay up to 10% of the original loan each year without penalty. So this option will allow you to repay your mortgage early, but without having to pay the higher rate of interest for an offset mortgage.

Overpaying your mortgage by just 10% a month will shorten the typical mortgage period from 25 years to 18 years and save thousands of pounds in interest payments.

Tip! Whenever possible try to secure a self-certified mortgage. Unlike the UK this type of mortgage does not necessarily carry a higher interest rate than a fully documented mortgage and could save you a lot of time and frustration assembling documents.

4) Focus On Other Debts First

It’s not always the best idea to pay off your mortgage early, especially if you have other debts. The fact remains that your home is probably the best source of cheap borrowing you’ll ever have access to. And there’s no point overpaying on your mortgage (which costs you perhaps 4% interest) when you’re paying interest on credit card debts (normally 7%+), personal loans (normally 7%+), overdrafts, storecards or any other form of credit (all of which usually start at a interest rate of 20%+).

Tip! APR stands for the Annual Percentage Rate.

So before you start cutting chunks out of your mortgage, consider whether it would be better to pay off your other, more expensive debts first.

by Stuart Laing

Copyright (c) Get Out Of Debt.

Are you tired of being in debt? Do you resent the large repayments every month? Visit http://www.icanhelpyougetoutofdebt.com for free, impartial information on how to reduce debt.

This article may be freely distributed as long as the copyright, author’s information and active links are included.



  • Leave a Reply