Make no mistake: Every dollar counts when it comes to paying off your mortgage faster. The quicker you can pay off your loan, the more you will save in interest.
Armed with information and commitment, these tips will help you pay off your mortgage faster. I am going to share with you the 4 most common mortgage payment strategies that will reduce the length of your amortization; the information banks leave out for you. So, let’s start with the easiest one.
1.Accelerated bi-weekly payments (key word here is “accelerated”)
Most people don’t know this but there are 2 choices when it comes to by-weekly payment, “bi-weekly accelerated” and “bi-weekly”. Make sure to choose the “bi-weekly accelerated” option instead of the “bi-weekly”. The simple “bi-weekly” option won’t do anything to reduce your mortgage. Believe it or not, most people out there have the “bi-weekly” option thinking that they are paying their mortgage fast but they are not. The reason is, the bank takes the amount you pay monthly, multiplies it by 12 months and divides it by 26 bi-weekly payments. The year has 12 months, 52 weeks and 26 cycles of bi-weekly payments. Instead of paying your mortgage on a monthly basis, 12 times per year, or the traditional bi-weekly way, be smart and pay your mortgage through “bi-weekly accelerated” (every two weeks) for a total of 26 payments each year. Just by paying “bi-weekly accelerated”, you will reduce the length of your mortgage by 3 years and you will save a lot of money on interest. Take this example: A $300,000 mortgage paid on a monthly basis with a 3% interest rate over 25 years will cost you $125,920.44 in interest. However, if you increase your payment frequency to “accelerated” bi-weekly payments, you will shave nearly three years off your mortgage and save $16,058.57 in interest.
2. Round up your mortgage payments.
Let’s say your monthly mortgage payment is $1,543.00, consider rounding up to $1,600.00 if the budget allows. The extra $57 will do wonders for your mortgage and chances are you will barely notice a difference in your monthly budget. This top-up amount that you’re sending will reduce the balance of your mortgage as well as the amortization schedule.
Example: Bi-weekly payments on a $230,000.00 mortgage with a 2.75% interest rate over 30 years would be $468.53. Increase those bi-weekly payments by just $31.47 to $500.00 and you’ll shave nearly six years off of the amortization schedule. How cool is that?
3. Put “found” money towards your mortgage payments
Unexpected sources of money such as a birthday cheque from a relative or a bonus at work are considered sources of ‘found’ money. “Found” money can be easily applied to your mortgage without any impact to your budget because it wasn’t money you were expecting or counting on. Example: A one-time payment of $5,000.00 on a $250,000.00 mortgage at 3.75% interest rate over 30 years will decrease your mortgage amortization by over 12 months. Amazing right?
Make a lump sum anniversary payment
Most banks will allow you to make a lump sum payment once a year in the month of the anniversary of your mortgage. This lump sum is applied directly to the principal you owe. Example: An annual lump sum payment of $250.00 on a $400,000.00 mortgage at 3.50% interest rate over 25 years, combined with a bi-weekly payment frequency will decrease your mortgage amortization by over 3.5 years.
Once you have a mortgage and start making your payments, it can be easy to just forget about it because it’s an automatic payment. But don’t stick your head in the sand, be an informed homeowner, keep yourself up-to-date on interest rates and new mortgage options. The freedom of being completely mortgage free is a dream for many people, so take the time to do some research and calculations to figure out what options are right for you and you will thank me.