Buying yourself a home is a huge accomplishment and investment for most people. Not only do you have a place to live that you can call your own, but you have 20 to 30 years of mortgage payments to look forward to. And even though making payments for all those years seems daunting, it is the interest you have to pay that really makes some people uncomfortable.
Over the course of a standard, 25-year mortgage you can expect to pay thousands of dollars in interest, even if your mortgage rates are decent the entire time. Historically, most home owners would just do the “grin and bear it” routine, make their payments and be happy they own a home.
Today, more and more homeowners are deciding that the interest payments are just too much as they look for ways to pay off their mortgage faster. Keep in mind that in some cases, paying off your mortgage faster results in penalties and various fees, but you can arrange for this option with no penalties when you set up your mortgage.
Increase Payment Frequency
One way to pay off your mortgage faster is to keep your mortgage payment constant, but make payments more often. Accelerated bi-weekly payments are one example of this. Instead of making one payment per month or even one payment on the 1st and one on the 15th, you make a payment every two weeks. This results in 26 total payments every year instead of the 24 you’d make on just a twice a month schedule.
Doesn’t seem like much, but for a $300,000 mortgage at 3% interest over 25 years, you’ll save just over $16,000 in interest by using accelerated bi-weekly as opposed to monthly. Can you believe such a little shift can make such a huge difference? Think of all the things you could buy with $16,000!
For most of us, money doesn’t just show up unexpectedly nearly as often as we would like, but it still happens. Most people refer to this as “found” money and if you’re interested in paying off your mortgage faster you should apply it to the total every time you get it.
Some of the common sources of money you weren’t expecting include birthday cheques, inheritances, work bonuses and tax refunds. If you can apply this money directly onto your mortgage every time you see it, you’ll knock some serious time off your amortization.
Try Rounding Up
Another way to knock off a bunch of time and money from your mortgage is to round up your payments. As an example, if your bi-weekly mortgage payments are $683, round them up and pay $700 instead. You won’t notice too much of a difference when each payment is made, but over time you’ll knock several years off your original amortization period.
In many cases, you have the option of making a lump sum payment on your mortgage anniversary. This payment comes right off the principal owing and even if you only have a couple hundred available, it all makes a difference. Over the course of 20 years, you can knock a few years off and save yourself a pile of interest.
Stay In the Loop
Mortgage options and mortgage rates are always changing, so if paying yours off faster is important to you, it’s wise to keep yourself informed on all the new information. It is very convenient and comfortable just to make your automatic mortgage payments and leave it at that, but you may end up missing out on a new product or a change in interest that could potentially save you a lot of money.
Stay in contact with your mortgage broker or a real estate broker friend, or check different online sources to stay in the loop. If you have an issue with initiative, subscribe to online newsletters on the topic, so the information is delivered directly to your inbox.
Even though it rarely feels like it, you really do have more control than you think when it comes to your mortgage. When you consider all of the different lenders out there, keep in mind that they are competing against one another for your business. It’s easy to become intimidated when you think about them having the power of “yes” or “no” but ultimately they want your business.
Rules are rules and contracts are contracts, but making extra payments and paying down that mortgage faster is usually an option if you really want it to happen.
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The author of the article is Jeremy Benson. He has been writing about finance, mortgage and Canadian law since 7 years. Blogging is one among his greatest passions. Follow him on [email protected].