When Is It Beneficial To Overpay Loan Payments?

When is it beneficial to overpay loan payments? Overpayments can reduce the time you have to pay your loan and it can greatly reduce the amount of interest you will pay on the loan since most interest is calculated on a yearly basis.

Overpaying your loan, mortgage, or line of credit is completely possible, but you need to find out if it is right for you. Overpayments can reduce the time you have to pay your loan and it can greatly reduce the amount of interest you will pay on the loan since most interest is calculated on a yearly basis. Overpayments can free up more money for you in the future if you pay off your loans early. Some banks may even encourage you to overpay your loan as Anne Reed of Acceptance Mortgage in New Jersey tells us.


"There are specific programs aimed at doing just this such as bi-weekly payments," Reed said.




It is always a good idea to overpay a loan if you have the extra money. If your car is paid off and something goes wrong with it you will have to money to replace it with a new one. You would not want to be in a situation where your car became inoperable and you were stuck making payments on something you could not even drive. If your car needed an expensive repair you would be more inclined to fix it if you still owed a lot of money on the loan. It if was paid off, you could decide whether the life expectancy of the car is enough to warrant the repair.

A mortgage is a great loan for overpayment as it will help you to own your home sooner. If you are within fifteen to twenty years of retirement, it is a great idea to put extra money toward your mortgage. Not having a mortgage payment when you retire will allow you to live more comfortably on your fixed income. If your home is paid off, you will have one hundred percent equity to tap into in the event of an emergency or if you decide to make improvements. You may even be able to afford to rent out the home as an investment property and purchase a less expensive home for you to retire in. Be careful when putting extra money toward a mortgage however.

"The borrower should be careful to be sure that their particular state does not impose a prepayment penalty should the mortgage be paid off before the term of the loan agreed upon," Reed said. Some borrowers may even have a specified limit on the amount that you can overpay at each payment.

Occasionally a lender will give you the option of putting your overpayments into a special account that you can borrow against later. This could be a great insurance policy if you have a seasonal job or if you become disabled. You may even be able to designate the money in your overpayment fund to reduce your monthly payments during times when you might be laid off or taking time off from work to study or travel.

If you have a high-interest loan it is especially beneficial to overpay. The money you can save in interest will be much higher than any money you could make by investing in a savings account or mutual fund. Though it might be tempting to have your money in a nest egg, it really can make more financial sense to use it to get rid of high-interest debt. Once your debt has been eliminated you can begin to earn interest with savings.

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