Low home prices mean reduced mortgage amounts. Low interest rates save you even more. How about taking it to the next level and pay off your mortgage even faster? Here are some ideas I picked up in a recent Toronto Star article.
Making mortgage payments for 20 to 30 years can take a huge bite out of your budget, even with low interest rates. A $300,000 mortgage at 3.29 per cent, amortized over 30 years will cost $161,300 in interest.
Yet it’s surprisingly easy to reduce your amortization – and the amount of interest you’ll pay. When you’re mortgage free, a big part of your budget will become available to help achieve your other financial goals.
Here are three ways to become mortgage free faster:
1. Make a lump sum payment
A lump sum payment, or prepayment, reduces your outstanding principal. The sooner you can make a prepayment, the less interest you’ll pay over the long term.
Coming up with a large lump sum - up to $75,000 on a $300,000 mortgage - is next to impossible for most people. But even a small sum – from a bonus or tax refund, for instance – can reduce your overall interest amount.
2. Increase the amount of your payments
Most mortgage lenders allow you increase your payment by 10 to 100 per cent, but there may be a fee if you change it again during the calendar year. This option is easier than coming up with a large lump sum.
Paying an extra $100 a month on a $300,000 mortgage at 3.29 per cent over 30 years will save you more than $11,000 and reduce the amortization by 3 1/2 years.
3. Make more frequent payments
Financial institutions offer a number of payment options. If you decide to make more frequent payments, make sure you choose an accelerated option. Accelerated bi-weekly payments can save you thousands in interest charges because you’ll make the equivalent of one extra monthly payment each year.
There is very little extra savings if you just switch to a more frequent payment without taking the “accelerated” option.
On the same $300,000 mortgage as above, a bi-weekly payment will save $289 in interest over the life of the mortgage. On the other hand, with an accelerated bi-weekly payment (an extra $50 per payment) you’ll save more than $18,000 over the life of the mortgage.
You can save thousands in interest by paying off your mortgage as fast as your budget allows. Contact your mortgage lender for your payment options and any penalties or fees you may be required to pay.
Best of Luck!