There are a lot of people that are just happy making their mortgage payments every month knowing that their 25 year mortgage will be paid off some day. For others, it's a race to the finish line where getting the mortgage paid off as fast as possible is a priority. If you fall into the second category and can't wait for the day when you can finally set the mortgage papers burning, here are the 3 tips you need to know in order to make it happen.
Shop Around For The Best Mortgage Possible With Your Credit Score
When a mortgage company has a small overhead cost to stay in business it typically means that they will not charge you unreasonable ongoing service fees. Make sure you know the fees charged by your mortgage company before you sign on a loan.
The Minimum Amount Is Just That: The Minimum
Just because you have a minimum amount to pay every month doesn't mean that you should settle for paying this amount only. Most mortgages these days allow you to make extra payments without penalty and you should definitely take advantage of the opportunity - especially considering the low mortgage rates that are available right now. You'll end up saving thousands of dollars on interest payments down the road if you can manage to pay a higher amount than the minimum required.
Lump Sum Payments Really Help The Cause
A lot of people receive a tax refund every year that can be put towards paying down the mortgage. If you don't want to put the whole refund into the home loan you should at least consider putting a part of it towards the cause. Any type of financial windfall should be considered as a prime candidate to put towards the final mortgage amount. You'll just have to check your home loan privileges and options to find out how much you can additionally pay per year. In most cases it's somewhere between 10% - 25% of the total amount.
Pay a Fixed Amount Extra During Every Mortgage Payment
When you prepay a little extra every month, or any time during the term of your mortgage, increasing your payment by even a few dollars each month will pay down your principal amount faster. It is a good idea to pay 10-15% more each month.
This amount shouldn’t put too much extra burden on you, and it will help to pay off your mortgage much faster. For example, if you increased your mortgage payments by just $170 from $830 to $1,000, you could save almost $48,000 in interest over the entire amortization period of your mortgage, and you could own your home about 8 years sooner.
Consider using your tax refund, work bonus or any extra money you can save, and apply it directly to your principal amount. Check your mortgage documents to find out how often you can prepay and in what amount. Many loans don't prohibit you from doing this, however the lender may have parameters on how many extra payments you can make. Ask this question when shopping for a mortgage loan.
Bi-Weekly Payments Are Better Than Monthly Payments
When you make a payment every two weeks instead of monthly, it works out to be an extra monthly payment made per year. You'll end up making the equivalent of 13 payments annually instead of 12. This will greatly accelerate your mortgage term and will save you tons of interest. In most cases you won't even notice that you're paying the extra amount yearly so it won't seem like you're taking on an extra debt load.
Pay As Much As You Can At Renewal Time
Most mortgages become open at renewal. This means you can pay as much as you want on your mortgage. If you chose a 5-year, fixed-rate term, and made a $10,000 lump-sum payment every time your mortgage came up for renewal, you would save about $37,481 in interest over the entire amortization period of your mortgage.
Red Flag Your Extra Payments
Always check your mortgage statement to make sure that any extra payments you made are being counted against the principal and that your bank has accurately documented your payments. Make the extra principal payments on a separate cheque and make a note on the memo line stating that the payment should be applied to principal reduction only. At tax time, tally up those payments and make sure they've been applied correctly.
Stay Informed About the Mortgage Payment Process
Once you have a mortgage, aside from making the payments, it's easy to forget about it altogether. By keeping up-to-date on interest rates and new products could save you money. You may want to shop for another product that better suits your needs. For example, to qualify for a mortgage, you may have started out with a lower-rate adjustable rate mortgage, but you want to switch to a more long-term affordable fixed-rate mortgage later.
When Should You Hold Off on Paying Your Mortgage Faster?
While paying down a mortgage quickly may be a wise decision for many homeowners, it's not for everyone. For example, you may want to switch to investing in mutual funds when yields return 10-12% annually. For most people though, this is not a mathematical issue but one of security, as they just want that mortgage paid off. For people who are very debt-averse, the peace of mind of paying off the house more quickly is worth the price.
Secondly, if you are planning on moving soon, you may want to hold off investing money into your existing home as you may need the money for a down payment, closing costs or buying new furniture for your new home.
As you can see, with a little research, you could save on your mortgage. The truth is: the banks won’t tell you how to save money on your mortgage as they want to make the interest on the money that they have loaned to you. If they were to help you save money, they would lose money and their profits would stagnate. Make sure that if you implement changes to save on your mortgage it is the right decision for you.