Hurricane Milton destroyed our house in Florida. We decided rather than try to rebuild we would buy new and put the old one up for sale. Found a house, at $470k, made the down so now our mortgage is $364k at 6.5% on 30yr.
Our other house, which we expected to take a while to sell, sold in 10 days at $449k. We walked away with $414k.
Naturally, we want to pay off the new house as soon as possible. But a friend of mine who worked in the mortgage industry 20 years ago gave me a list of reasons to pay at least six months of mortgage payments before paying off. There is no penalty for early pay off.
Since it has been a long time since she worked in that position, can someone still working with mortgages give me reasons to not pay it off right away?
The reason to wait six months typically benefits the lender, not the borrower. It’s related to how lenders might get charged back by the investor if the loan is paid off too quickly, which could include a chargeback on the loan officer’s commission.
@Riley
In my experience, there isn’t any direct benefit to the customer for delaying the payoff, only to the lender due to how early payoff impacts their financial arrangements and commissions.
@Riley
It’s important to understand that the chargeback from the investor to the lender for early payoff is not guaranteed but it is a risk. This policy is mainly in place to discourage brokers from flipping the loans they close quickly. One potential benefit for not paying off immediately is building a payment history, which can help your credit score.
@Riley
I work as a lender, and this is accurate. The loan officer who closed your loan would potentially have to pay back their commission if the loan is paid off too quickly. This is typically more of a concern for the lender than for you, especially if there’s no prepayment penalty.
From a personal perspective, the lender losing their commission can be a strong reason not to pay off the loan early, especially if you value the service they provided. It’s a way to ensure they are compensated for their work, even if it means slightly higher costs for you in the short term.
The primary reason to delay paying off your mortgage early is related to the lender’s commission structure. If you pay off the mortgage within six months, the loan officer might have to return their earned commission on your loan.
I’m curious about what specific reasons were listed by your friend. Generally, there aren’t many benefits to the borrower for delaying payoff when there’s no penalty for doing so, unless considering the financial impact on the lender’s side.
It seems your friend might be projecting old norms or possibly biased views from their past industry experience. It’s wise to consult with someone currently in the field or do your own research to understand the most up-to-date practices and benefits regarding mortgage payoff.
Another strategy could be to pay off a significant portion of the mortgage but not all, investing the rest. This could potentially yield a higher return than the cost of the mortgage interest, depending on market conditions.
@Westin
Paying off the mortgage fully would eliminate any interest payments and could free up your monthly budget significantly, allowing for more flexibility or investment opportunities.
Essentially, there is no benefit to you as the homeowner in waiting to pay off the mortgage, unless you are trying to avoid causing a financial loss to your lender through commission chargebacks.
What reasons did your friend give? Without specific incentives or financial penalties, it might make more sense to pay off the mortgage and save on interest.
While it’s understandable to consider the impact on the loan officer’s commission, your primary responsibility is to your own financial health. If paying off the mortgage early saves you money and there’s no penalty, it would generally be in your best interest to do so.
@Cael
If you’re concerned about the loan officer’s financial situation, you could consider other ways to support them, like referrals, which don’t compromise your own financial benefits from paying off the mortgage.
Consider the tax implications and the potential investment returns from not paying off the mortgage immediately. If you can earn more through investments than you pay in mortgage interest, it could be financially advantageous to delay payoff.
@Toryn
While tax deductions for mortgage interest can be beneficial, they often do not offset the total amount paid in interest. It’s crucial to do a thorough cost-benefit analysis to decide what’s financially best for you.
The lender and the loan officer have financial incentives tied to the mortgage lasting at least six months due to how commissions are structured. Knowing this, you might feel an ethical obligation to wait, but from a strictly financial perspective, paying off the mortgage sooner could be more advantageous for you.
One approach could be to pay down a significant portion of the mortgage while leaving a small balance until after the six-month period, thus minimizing interest payments while also not negatively impacting the loan officer’s earnings as much.