Essentials on Paying Down Your Mortgage Faster

November 26, 2010 § Leave a comment

Paying down your mortgage faster could save you tens of thousands of dollars in interest over the life of your mortgage. There are a few ways to fast-track your mortgage, but first it’s important to understand how your principal and interest payments are applied.

For each mortgage payment you make, the money is first applied to the interest and then secondly to the principal amount – which actually reduces the amount you borrowed from the lender. A lower interest rate means less of your payment is going to interest, and more of it to principal.

During a 25-year mortgage, the total amount of your payments could be double the principal amount that you originally borrowed, or more. The key to saving money on your mortgage is to pay off the principal as fast as possible.

If your household budget allows, the most straightforward way to pay  off your mortgage faster is to increase the amount of your payments.

Normally once the payments are increased you will not be allowed to lower your payments until the end of the term (typically 3-5 years). Even increasing payments by $50/month can shorten the amortization by years and save you thousands in interest costs.

If you renew with a lower rate, keep the monthly payments the same as before. At the end of your mortgage term you will have to renew or renegotiate your mortgage. You maybe able to get a lower interest rate – and if this is the case you would have the option of reducing the amount of your regular payments. The best thing to do in order to take advantage of the situation is to simply keep the amount of your payments the same as they were before.

You can also choose an “Accelerated” option for your mortgage payments. You can spend about the same amount of money on your mortgage each month and still save by choosing accelerated options. These payment options will save you thousands – and even tens of thousands in interest charges because you’ll pay off your mortgage faster. The reason is that you will make the equivalent of one extra monthly payment per year! Choose Accelerated Weekly or Accelerated Bi-Weekly options and you will pay off your mortgage 4 years faster on a 25 year amortization.

Lastly, you can make Lump-Sump Pre-Payments. The great thing about doing this is it all goes to principal! Making lump sump payments is ideal for those that have just came into money from things like an inheritance, a raise or a bonus, or just an accumulation of savings. Remember to check with your mortgage broker or mortgage lender for the applicable terms and conditions. Most closed mortgages offer 15-20% pre-payment privileges. “No Frills” mortgages with low rates but limited terms offer around 5-10%. You can make these lump-sum payments once per year, and it is always based on the original balance of the mortgage. It is best to make these payments earlier in the life of the mortgage, as it will have more effect that way. You can pay off your mortgage 5-10 years faster with regular, sizeable lump sum payments.

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