The prospect of a mortgage debt over decades – whether or not you are arranging a new mortgage or renewing an existing one – may be discouraging. And after you see what proportion of your payments go toward the interest in the early years of your mortgage, it is even more discouraging. But there is hope! Here are a few ways to reduce your mortgage payments or pay off your mortgage sooner.
You will dramatically scale back the amount of interest over the lifetime of your mortgage by doing some straightforward things, like creating bi-weekly payments, or taking advantage of your pre-payment choices.
Term and Amortization
Before you sit down with me, you should consider how long a term you want and how long an amortization you are seeking. The term – generally one to 10 years – is the length of time you are committed to a mortgage rate, lender and that lender’s conditions. Amortization is the length of time it will take to pay off the mortgage in full (generally 25 years).
While a long amortization may have smaller payments and allow you to have more cash flow, it will also cost much more to borrow in the long run.
In regards to the mortgage term, think about how individuals typically move every 5 years; 3.5 years is the average for first-time and young borrowers. If you think you might move in a few years, a five-year term might not add up since you will pay a penalty to “break” your mortgage before its term is over. That penalty might be 3 months interest or the difference between your rate and the current rate.
However, if you’re shopping for another house and stick with the same lender, you will typically transfer your balance and term to avoid penalty. If you would like to increase your mortgage, the previous rate along with your existing mortgage are mixed with current interest rates on the new mortgage amount. As your mortgage broker, I am always available to negotiate on your behalf.
One of the only ways to quickly reduce your mortgage balance is by creating accelerated bi-weekly payments. By paying each alternative week (26 times a year) instead of monthly, you’re creating the equivalent of 1 month’s further payment throughout each year. You will knock four years off a 25-year mortgage by doing bi-weekly payments.
Take a $250,000 mortgage with a 25-year amortization as an example, with an interest rate of 3.69%. If you make the monthly payment of $1,273.38, over 25 years you will pay $165,105 in interest – $415,105 in total for principal and interest.
If, instead, you make accelerated bi-weekly payments, you will pay $636.69 every other week. Over 25 years, you will pay $90,362 in interest, saving you $50,985.
And if you opt for a 20-year rather than 25-year amortization and make bi-weekly payments, the savings are even more dramatic: you’ll save $74,743 in interest.
As your mortgage broker, I can advise you as to what other options your lender may offer to pay down your mortgage. For example, some lenders allow you to increase the amount of your payments – you can usually increase your payments by up to 20 per cent a year, in addition to being able to pay off 20 per cent of the balance.
Surrey / Langley Mortgage Broker
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