Paying a Little Extra on Your Mortgage Can Go a Long Way
For many homeowners, the day you begin paying your first mortgage is also the day you dream about making your final payment!
While your mortgage interest rate is the lowest among all debts, there’s a sense of freedom in being able to shrink that principal balance down and shorten the time in which it’ll take you to become completely mortgage free.
Reducing your principal balance decreases the amount of interest you’ll have to pay on your borrowed mortgage amount.
Every bit counts
Since every extra dollar paid towards your mortgage is significant, it’s really important to ensure your mortgage includes prepayment privileges.
While many people think of lump-sum amounts when they hear the phrase ‘prepayment privileges’, this also means you can prepay small amounts over the course of your mortgage term.
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.
3 key ways to use prepayments to your advantage
1. Switch up your payment schedule. Why not opt for 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. With this option, you’re making one additional monthly payment per year, which can really add up over the course of your time as a mortgage holder.
2. Round up your mortgage payments. Even rounding up your mortgage payments a few dollars each cycle can help your balance decline sooner. 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 over the course of a year.
3. Use work bonuses, inheritances or extra savings to your advantage. 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. As well, some allow you to make prepayments on the day you make your regular payment.
Do you have questions about paying down your mortgage faster? We’re always happy to help provide strategies! We’re just a call or email away.