You can cut Years off Your Mortgage and
Save Thousands of Dollars
Most homebuyers choose a mortgage with repayment terms that
suit their current lifestyle and budget. But what if you find yourself with
extra cash on hand down the road? By using that cash wisely and paying down your
mortgage faster, you can save thousands of dollars in interest and cut years off
the life of your mortgage. Even if you've locked into a long-term mortgage with
an affordable interest rate, you may still have the flexibility to pay down your
mortgage faster than scheduled. Many financial institutions now offer generous
prepayment options, but some limit the frequency with which you may apply them.
To be able to use your extra cash to reduce the interest costs on your mortgage,
choose a mortgage lender that offers the types of prepayment options described
below.
The following examples illustrate exactly how affordable
these different prepayment options can be. Each example is calculated based on
an $80,000 mortgage at a constant interest rate of seven per cent amortized over
25 years for a monthly payment of $560.00, here are four budget-friendly ways to
put extra cash to work.
ACCELERATED NON-MONTHLY PAYMENTS:
When applying for a new mortgage or renewing an existing one
review your budget and your regular cash flow patterns and look for a
"fit". If you're paid every two weeks, for instance, consider matching
your mortgage payments to your paydays and by choosing a biweekly payment
schedule. More frequent payments matched to the timing of your income can result
in substantial savings over the life of your mortgage.
If you're comfortable adding a little more to each payment,
you might think about accelerating your mortgage payments. Assuming you have
already selected a biweekly payment schedule, an accelerated biweekly payment
would amount to your original monthly payment of $560.00, divided in half
($280), and paid every two weeks. By following this formula, you'll actually end
up making 26 payments per year, or the equivalent of 13 monthly payments. And
like many people, you'll barely notice the difference.
In the example outlined above, you'd be paying only about $47
more each month than you would in the regular monthly payments. But here's the
big difference your 25-year mortgage would be paid off in just 20.5 years and
you'd save almost $19,000 in interest costs over the life of your $80,000
mortgage.
ANNUAL PAYMENT INCREASE:
If your mortgage proves easier to handle than expected and you
feel you can afford slightly higher payments, you could consider an annual
payment increase, an option offered by many lenders today. This option allows
you to boost your regular mortgage payments once each year throughout the term
of your mortgage and to apply that increase directly to reduce your principal.
Let's say you earn a three per cent salary increase for four
subsequent years. By increasing your monthly payment amount by three per cent
once each year for four years an increase of approximately $17-$20 per month
every year you can cut 5 years off mortgage and save more than $19,000 in
interest costs.
DOUBLE-UP PAYMENTS:
You may find that you sometimes have extra cash, but don't
want to commit to higher mortgage payments on a regular basis. Some lenders
allow you to make additional payments against your mortgage balance (up to the
equivalent of a full monthly payment), occasionally or even every payment date.
The extra payment is applied directly to your mortgage principal to reduce the
balance. If you were able to make the equivalent of just two additional monthly
payments each year, your 25-year mortgage would be paid in less than 18 years
and you'd cut your total interest costs from approximately $ 88,000 to just
$59,000 for a savings of almost $29,000!
LUMP SUM PAYMENTS:
A bonus or your annual tax refund is tailor-made for a
one-time lump sum payment on your mortgage. Most lenders permit this type of
prepayment and, once again, the additional capital goes directly towards
reducing your principal. An annual lump sum prepayment of $2,000 made each year
until your mortgage is paid off will save you almost $40,000 in interest on your
$80,000 mortgage and you'll be mortgage-free 10 years earlier than expected!
So remember look for a lender that gives you a selection of
prepayment options for maximum flexibility. By using these options wisely, you
can save on interest costs over the life of your mortgage regardless of your
personal cash flow patterns.
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