Why You Ought To Think Carefully Before You Make Excess Home Loan Installments

by Eileen E Jacobs on February 27, 2012

Quite a few property owners are generally in a hurry to repay their mortgage loans. This isn’t invariably a sensible choice. Initially, you reduce your liquidity along with putting your house equity at a greater financial risk. This is particularly the situation in case you have a small amount of money reserved and when you’ve got very few liquid assets. It is best to shoot for having a minimum of 6 months of financial savings put aside.

Glance at the following 2 cases. The very first is a property owner that consistently will pay additional principal on the mortgage loan having the goal of the property getting paid in full early. Sure, it’s true that when you spend a little bit more monthly, you’ll pay the property off significantly earlier. At the same time, the other property owner merely pays the bare minimum on a monthly basis.

Let’s imagine that a few years go by and both homeowners lose their jobs. And they can no longer make their mortgage payments. Who is better off? The first homeowner has more equity than the second owner. However, the real estate market is slow and she may not be able to sell the home before it goes into foreclosure. And, yes, the second owner is in the same situation.

With that in mind, the other owner, who was merely paying the minimal monthly charge, has got extra alternatives. She is aware that the lender does not have as much incentive to take back the house. This occurred because the mortgage loan balance is large. Because of this, the lending company will not be equipped to attain very much by taking the property back. The initial owner is a far better target for the loan company since they can market the home and reclaim the debts.

Let’s also pretend that the second homeowner either saved or invested the money in which she was considering paying on the mortgage. She now has multiple options. She can keep current on her mortgage from these savings. This is the case whether she kept the money in a savings account or invested the money in liquid investments like stocks. Or, if she stops making the payments, the bank would be in no rush to foreclose.

Banks are incentivized to foreclose on properties with low loan balances first. This is because they can recover their losses easily. A home that is underwater or has a high balance will cause the lender to incur a loss, which is why lenders are seldom in a rush to foreclose on an underwater home. This is especially the case in a soft market because it would only add to the inventory of homes for sale, which is one more thing driving down prices.

Eileen E Jacobs is a loan originator in Las Vegas, NV. Las Vegas Home Mortgage

Leave a Comment

Previous post:

Next post: