by Corrie B
on June 8th, 2012
You may have seen ads about it on TV, or received something from your bank about it in the mail. They make is seem pretty good. Read on and find out the other side of “mortgage vacations”.
What is a Mortgage Vacation?
Not to be confused with a mortgage on your vacation home, a mortgage vacation is time away from making payments on your mortgage. There is a catch. You had to have made extra payments prior to “taking a vacation”, which means you had prepaid some of your mortgage. As an example, if you have a total monthly mortgage payment of $1000 and you have made a lump sum payment or double payments in the amount of $2000, then you can have a two month vacation from your mortgage payments. The banks hope you like this idea, but I’ll tell you why you shouldn’t fall into their trap.
Why You Shouldn’t
You worked hard to save up the extra payments to get ahead on your mortgage. Now don’t get me wrong, taking a mortgage vacation isn’t throwing this money away, but it is throwing away the savings in interest that you gained by paying this extra amount and stretching your mortgage period back to where it started. See our article on saving money by paying your mortgage off sooner
to get a complete explanation on how extra payments save you money. Throwing away your interest savings is only part of why you shouldn’t take a mortgage vacation. You could be losing thousands of dollars or more, but it can get worse. The second point is to think of these extra payments as insurance instead of a possible exciting vacation. What if, down the road, you can’t make a payment on your mortgage? Wouldn’t it be more comforting to know you have a safety net to keep the bank from foreclosing on your mortgage? I’ll talk more about this second point in the “Why You May Need To” section.
Why the Bank Would Like You To
Simple. They want their money back. By making a “mortgage vacation” seem like a desirable option, they are hoping to convince some people to undo the hard work they’ve put in saving up their extra payments. You’ve eaten into their profit margin on your mortgage, and they have come up with a way to fix this and have people enjoy losing the money back to the bank.
Why You May Need To
As I mentioned above, the extra mortgage payments you have made will create a safety net for you. The larger the amount of these extra mortgage payments the larger the safety net becomes. Say that over the course of several years you’ve managed to make lump sum and double payments in the total amount of $12,000. Now, using the $1000 payment example above, you would have a safety net that would last you a year. Your personal situation may unexpectedly change and you may not be able to make your mortgage payments for a month or two. It will definitely help you sleep at night knowing your home is secure, and you can focus your attention on getting things back on track for yourself.
Save yourself thousands of dollars in interest payments, and build yourself a safety net at the same time. Don’t fall for the banks marketing schemes and take a mortgage vacation unless you have no other option. They only want one thing; your money.
Pay off your mortgage early,
and you’ll be on a permanent vacation