Everyone dreams about their ‘mortgage burning’ date the day they become a homeowner. While mortgage debt will cost you the lowest interest rate among all debts, there’s a sense of freedom in being able to chip away at that principal balance and shorten the time in which it will take you to become mortgage free.
After all, reducing your principal balance will, in turn, slash the amount of interest you’ll have to pay on your borrowed mortgage amount.
The important thing to realize is that every extra dollar counts. That’s why it’s essential to ensure your mortgage includes prepayment privileges.
While many people think of lump-sum amounts when they hear the phrase ‘prepayment privileges’, this right also means you can prepay small amounts over the course of your mortgage term. So, it’s important not to dismiss this perk.
Even if you’re in your very first mortgage, there are some small steps you can take now to reduce the overall amount of money you’ll pay towards owning your property outright.
One of the easiest ways to put more money towards your mortgage while not significantly impacting your cash flow is moving to a different payment schedule, such as accelerated bi-weekly mortgage payments.
Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but will also save you a significant amount of money over the term of your mortgage.
This option means you’re making one additional monthly payment per year, which can really add up over the course of your years as a mortgage holder.
Even rounding up your mortgage payments a few dollars each payment can help make your balance decline sooner. If you round up your mortgage payment from, say, $766 to an even figure such as $800, you can feel confident in knowing that every extra bit goes toward your principal.
If you renew your mortgage at a time when mortgage rates are lower, consider leaving the payments the same as you have been managing throughout your former term. Chances are, you won’t miss the money because you’re used to paying that amount, so you can use this drop in rates to your full advantage.
Take advantage of flexible payments. Most lenders allow you to increase your regular payment up to a set maximum, such as 15%, while others allow you to double up your payments. Be sure to know these rules before making extra payments so you’re not penalized for paying too much within the year.
Have you received a bonus, inheritance or saved some extra money? This is when a lump-sum payment option can come in handy.
Most lenders will allow you to make a lump-sum payment of anywhere between 10% and 25% of the value of your mortgage per year. The lump-sum payment is based on either the original amount you borrowed or the amount currently outstanding.
Since mortgages decrease with each payment, it’s best to negotiate a lump-sum payment option based on the original amount you borrow. That way, if you come into some money you can pay down the largest amount possible.
Another factor to consider is when you can make a lump-sum payment. Some mortgages allow prepayments throughout the year, while others permit them only on the anniversary date. Still others allow you to make prepayments on the day you make your regular payment.
If you can’t pay the maximum prepayment amount, it’s still worth your while to at least make some form of extra payments, even if it’s a few thousand dollars each year. That will still save you thousands of dollars in interest payments throughout the life of your mortgage.
Do you have questions about paying off your mortgage faster? We’re always happy to help! Answers are just a call or email away.