Saving your clients money on their mortgages is your secret weapon in generating repeat business and referrals. Here’s how home loan prepayment can help.
Satisfied clients lead to repeat business and referrals. And what satisfies a client more than helping them save money on their home purchase?
As a real estate agent, you already help your buyers get a good deal wherever possible. You help them determine a fair offer price, provide information on down payment assistance programs, and reopen negotiations after inspections as needed. But there’s an opportunity that many agents are missing: explaining the benefits of home loan prepayment to new homeowners.
In this article, we’ll explain how loan prepayments work and how you can talk to your clients about prepayment to help them save money.
What Is Loan Prepayment?
Loan prepayment simply means to pay off a loan early. This can be done by making extra installments or pay paying off the full loan balance with one big payment.
Benefits of Loan Prepayment
There are two impressive advantages of loan prepayment.
1. Pay off Loans Faster
For many borrowers, getting out of debt is a priority. Once a home loan is paid in full, the homeowner won’t have to worry about monthly mortgage payments any longer (although they will still need to budget for property taxes and insurance.) This is particularly beneficial for investors looking for higher cash flows and retirees living on a fixed income. But, of course, all homeowners see the advantage of freeing up the amount they were spending on principal and interest every month.
2. Save on Interest
As you know, many homeowners who hold the property for the full loan term end up spending more on interest than they spent on repaying the loan balance. For example, a buyer who takes a $400,000 30-year fixed-rate loan at 6% interest ends up spending $463,352.76 just in interest expense.
When borrowers prepay their loan payments, they reduce the balance on the loan, so there is less interest charged over the loan term.
Potential Downsides of Prepayments
There are three possible downsides of prepayments to be aware of. However, each of these is minor in comparison to the two substantial benefits we just discussed.
1. Loss of the Mortgage Interest Tax Deduction
Mortgage interest is typically tax-deductible. So reducing the amount spent on interest could reduce your client’s tax deductions for the year.
2. Possible Prepayment Penalties
Some loans have a prepayment penalty clause, designed to protect the financial interest of the lender. In many cases, this penalty applies only to sudden loan pay-offs (for example, if the loan is refinanced or paid off with the proceeds from the sale of the property). These penalties don’t typically apply to borrowers who make extra incremental payments against their loan balances. However, your clients should review their loan docs for any prepayment penalties as a precaution before making loan prepayments.
3. Temporary Credit Score Decrease When the Account is Closed
Many borrowers are surprised to see their credit scores dip a bit immediately after their mortgage loans are paid off. But this is a common occurrence because the length of credit is a factor in calculating credit scores. When the mortgage debt is paid off, that credit line is closed, and the average length of active credit lines on their credit report decreases.
Loan Prepayment Strategies
Here are three prepayment strategies you can teach your buyers if they want to take advantage of home loan prepayments.
1. Bi-Weekly Mortgage Payments
Borrowers who make monthly mortgage payments make 12 payments per year. But borrowers who pay half of their mortgage payment every two weeks end up making the equivalent of 13 payments per year (52 weeks per year divided by payments every two weeks equals 26 half-payments, which is the same as 13 monthly payments).
The borrower barely feels the difference on a weekly basis, but adding a whole mortgage payment per year can add up to sizable savings.
For example, on a $400,000 30-year fixed-rate loan at 6% interest, a new homeowner could save $99,248.03 over the full loan term by making bi-weekly mortgage payments, rather than monthly mortgage payments.
2. Applying Windfalls to the Loan Balance
Unexpected cash can come from many sources: a tax refund, work bonus, or inheritance, for instance. These amounts could be spent on impulse purchases, or they could be invested in loan prepayment.
The amount saved would depend on how much the borrower can apply to the loan balance, and when. But, as an example, if your buyer, with a $400,000 30-year fixed-rate loan at 6% interest, received a $10,000 inheritance soon after closing, and applied the full amount toward loan prepayment, they would save $46,866.03 in interest over the term of the loan.
3. The “Debt Snowball” Method
When most borrowers pay off a debt, they simply free up the amount of that debt’s monthly payment; they don’t allocate that amount to anything in particular. But borrowers who use the debt snowball method strategically apply that amount toward the prepayment of other loans.
For example, let’s say your buyer was paying $200 per month repaying credit card debt. Now that the debt is paid off, they decide to roll that monthly payment amount toward paying off their mortgage loan (again, we’ll say this is a $400,000 30-year fixed-rate loan at 6% interest). Over the full term of the loan, this could save your clients $98,270.88 in interest.
Work With Trusted Mortgage Advisors
Keller Home Loans is proud to support the hard-working real estate agents who go above and beyond to serve their buyers and sellers. As you help your clients navigate their real estate transactions, it pays to partner with the trusted mortgage experts here at Keller Home Loans.
We invite you to learn more about Keller Home Loans, explore our unique mortgage offers, and stay in the loop on all your clients’ deals with My Agent Station.
