Owning a home is one of the cornerstones of a solid financial plan. However, 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. Your mortgage agreement specifies the maximum amount you can prepay each year (usually 10 to 25 per cent) and how often (usually once per calendar year) without penalty.
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. The standard ones are: monthly, semi-monthly, bi-weekly and weekly. Many people match the frequency to their pay periods for ease in budgeting.
If you decide to make more frequent payments, make sure you choose an accelerated option. Accelerated weekly and 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. Choose any one, all, or a combination of the prepayment options available to you. Contact your mortgage lender for your payment options and any penalties or fees you may be required to pay.