Tips on How to Pay Off Your Mortgage Faster
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Ericka Hardy, Sales Representative
Royal LePage RCR Owen Sound
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How to Pay Off Your Mortgage Faster|
Make Bi-Weekly Payments
Instead of paying your mortgage on a monthly basis 12 times per year, pay your mortgage every two weeks for a total of 26 payments each year. This adds two extra payments per year which come directly off the principal.
Example: A $300,000 mortgage paid on a monthly basis with a 3 per cent 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 of your amortization schedule, and save $16,058.57 in interest.
Round Up Your Mortgage Payments
Every dollar makes a difference when it comes to paying off your mortgage. The quicker you can pay off your loan, the more you will save in interest. A painless way to get your mortgage paid off more quickly is to round up your mortgage payments. So if your payments are $638, consider rounding up to $700 instead. The extra $62 each payment will make a difference in your mortgage and you probably won't even notice the difference.
Add Your Raise to Your Mortgage Payments
If you receive a raise, instead of having some extra money to spend, consider putting the extra amount you make onto your mortgage instead.
Example: Bi-weekly payments on a $230,000 mortgage with a 2.75 per cent interest rate over 30 years would be $468.53. Increase those bi-weekly payments by just $31.47 to $500, and you'll shave nearly six years off of the amortization schedule.
Put Unexpected 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. Unexpected 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.
Put Your Tax Refund Towards the Mortgage
Consider increasing your RRSP contributions, and then put your tax refund directly towards the principal of your mortgage.
Example: A one-time payment of $5,000 on a $250,000 mortgage at 3.75 per cent over 30 years will decrease your mortgage amortization by over 12 months.
Make a Lump Sum Anniversary Payment
Most banks will allow you to make an extra mortgage payment each year, which is applied directly to the principal. Taking advantage of this by making a lump sum payment -- even if it's as small as $50 a year -- is a great way to chip away at your mortgage.
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. To be an informed homeowner, you need to keep up-to-date on interest rates and new mortgage options. You could potentially save a ton of money just by understanding what your options are. If interest rates have dropped since you took out your mortgage a few years ago and you are in the middle of a five-year fixed term with your bank, it may be worth paying the penalty for breaking your mortgage and then reapplying for a lower interest rate. This could possibly save you thousands of dollars over the long term.
** Keep in mind that paying down your mortgage early will mean less interest paid over the lifetime of the loan, and a shorter amortization schedule but it's not always the best decision for every homeowner. For example, if you have high interest debt on a credit card, no emergency fund savings, or haven't started saving for retirement yet, the interest you would save on your mortgage will not be as beneficial to you as dealing with other financial issues.**