Downside to Paying Off Loans

Some finance specialists caution consumers from paying off a loan if it means overlooking other loans with high rates. These loans maybe credit cards or high-interest car loans. Consumer’s credit ratings are calculated based off several factors. For example, a consumer’s general payment record and quantity of outstanding loans play an important part in figuring their score. Therefore, loans with high rates should be focused on first before one considers paying off any other loan.

End Result of Paying Off a Loan

A consumer must consider all his outstanding loans before deciding which loans to pay off fully. He should aim for loans that have huge rates before any other debt. This will yield the greatest effect. Those with a small amount of outstanding loans should definitely look at paying off loans in full; this will most certainly increase their credit score. Other advantages of paying off a loan in full include lower debt, increased chances of credit approvals and decreased chances of credit denials on your credit score. There is also a reduction in the overall amount you would have paid on interest when you pay off a loan early.

Lowering Outstanding Credit Can Reduce Your Credit Score

One example of the advantage of paying off a loan is that a great amount of outstanding credit can reduce your credit score. So having a reasonable amount to pay off on a car loan can mean a lower credit score. If you pay off the loans then you have a better chance at getting your credit applications approved which will increase your credit score.

Paying Off a Loan Can Increase Your Credit Score

Even if your credit score does not go up because of paying off a certain outstanding loan, lending companies, banks and credit card companies will see that a consumer has the funds available to pay off his loans on time and this will increase your chances of being approved for a loan.

During the time that you own your home, you want to choose the mortgage with the lowest total cost.

• If you only plan to live in your home for a few years, consider and adjustable-rate mortgage which will give you a much lower initial interest rate.
• If you plan to own you home for many years and interest rates are at an all time high, you may want to consider an adjustable-rate mortgage. An adjustable rate will have a lower start off rate than the fixed-rate mortgage
• On the other hand if you will own your home for a long time and the interest rates are at an all time low, you may want to consider getting a fixed-rate mortgage. Obtaining a fixed-rate mortgage during low interest rates will lock in the low rate over the life of your loan.

Some mortgages such as graduate-payment loans and interest-only loans are appealing for their low monthly payments. But only consider these options if you expect to have a problem paying the monthly loan payment. However, if you plan to live in your home for more than a few years, these loans may not be the best choices because:

• The total mortgage cost over the life of the loan tends to be higher in comparison to other loans.
• The interest-only loans do not build equity through amortization and the graduated payment loans can result in negative amortization.

If you are not certain whether a fixed-rate or an adjustable-rate mortgage is better, you may be happier and much safer with the fixed-rate mortgage. For the non-risk takers, the fixed-rate loan offers the peace of mind that comes from knowing that your mortgage payment will not increase over the life of the loan.

Pros and Cons of Fixed-Rate Mortgages

Described below are the advantages and disadvantages of four different kinds of fixed-rate mortgages:

1. Fixed-rate balloon Mortgage Loan – Advantages

• Predictable P&I payment
• Lower interest rate
• Rise in market rates will not cause hardship

Fixed-rate balloon Mortgage Loan – Disadvantages:

• Rates at payoff could be unappealing
• Do not benefit when market rates drop
• May have to refinance to pay off loan

2. Biweekly Mortgage Moan – Advantages:

• Will not suffer when market rates rise
• Payments are smaller
• Pay off loan quicker

Biweekly loan – Disadvantages:

• More payments in a year
• Do not benefit when rates fall.
• Beginning rate could be higher than ARM

3. Interest-only Loan – Advantages:

• Lower monthly payments
• Will not suffer when market rates rise

Interest-only Loan – Disadvantages:

• No debt reduction through amortization
• Must renew, refinance or payoff early

4. Conventional fixed- rate loan – Advantages:

• Predictable P&I
• Do not hurt when market rates rise

Conventional fixed-rate loan – Disadvantages:

• Do not benefit during a rise in market rates
• Beginning interest rate is higher than ARM

Adjustable-rate mortgages also have its pros and cons, overall payments decline when market fall, low initial rate compared to fixed-rate and you can lock in fixed-rate if rates fall. Disadvantages show that payment increase when rates rise, there is no stability because payment change over time and rates at payoff could be unattractive.

Okay, so there you have it – mortgage loans, the good the bad and the ugly. Although everything about mortgage loans – the pros and cons are not listed here, I hope this is enough information and a good start to get you moving in the right direction. Good Luck!