Maximizing pre-payment privileges
Making a decision to focus on quicker mortgage repayment not only saves you thousands in interest costs, it also allows you to greatly reduce your mortgage balance which ultimately increases the home equity. A lower mortgage balance owing is also a positive if rates have increase significantly by your renewal date, the lower balance will help in keeping your payments reasonable going into the next term. There are a few actions you can take to pay down your balance owing quickly and every “little bit” you can do will help significantly over the long term; utilize pre-payment privileges throughout the year, make accelerated weekly or bi-weekly payments, or take a shorter amortization period.
The amortization of a mortgage is the total amount of time it will take to pay off your entire mortgage balance owing. The amortization period is broken down into mortgage terms of 1-10 years with the most common mortgage amortization being around 25 years, although some lenders still offer a 30-35 year amortization if you are able to put down a larger downpayment. The shorter your amortization, the higher your mortgage payment will be. If you do decide to take a longer amortization to qualify, depending on how you repay your mortgage, you can still reduce your effective amortization by utilizing your pre-payment privileges throughout the mortgage terms you choose.
Again, there are 3 ways to pay your mortgage off faster;
- Increase your payment amount
- Increase the frequency of your payments
- Pay lump sums
The advantage of utilizing even a small portion of your allowable pre-payment privileges is any funds you pay in addition to your minimum required mortgage payments will go directly towards reducing your mortgage principal balance owing. By lowering your principal, you will save on interest and your balance at the end of your term will be lower.
If you are unsure of your allowable pre-payment privileges, contact your lender directly or review your original mortgage commitment to find out what pre-payment privileges your current mortgage term will allow. Usually, the lenders will allow you to increase your regular principal and interest payments by up to 15-20% each year without penalty as well as to pay up to 15-20% of the mortgage amount throughout each anniversary year without penalty. Most like the extra payments to be made on a regularly scheduled payment date at a minimum of $100. Some lenders also offer a double-up payment option and/or a skip a payment option.
Below are some examples of how you can save money by utilizing your mortgage pre-payment privileges during the initial first 5-year term;
Example: Susan has a mortgage approval for $300,000 with a 5-year term, fixed interest rate of 2.75%, amortized over 25 years.
INCREASING MORTGAGE PAYMENT FREQUENCY
By selecting accelerated bi-weekly payments instead of monthly, Susan will;
- Reduce her mortgage balance by an additional $7,452 in just 5 years
- Interest savings of $545 over the 5 year term
INCREASE MORTGAGE PAYMENT AMOUNT
By increasing her monthly mortgage payment by 10% once and maintaining it for the duration of her 5-year term, she will;
- Reduce her mortgage balance by an additional $8,870 in over the 5 years
- Interest savings of $583 over the 5 year term
LUMP SUM PAYMENT ONCE YEARLY
Let’s say Susan receives an annual bonus from work and makes one extra mortgage payment in the first year of her 5-year term, she will;
- Reduce her mortgage balance by an additional $5,905 over the term
- Interest savings of $380 over the 5 year term
RENOVATE TO INCREASE VALUE
As property values are subject to the ups and downs of the market conditions, if you are planning to renovate your property to increase the value, consider consulting a real estate professional to confirm the cost of the improvements will be offset by an increase in your home value. Double check to ensure you’re not spending funds to renovate that you won’t get back by way of increased market value.
It’s easy to see that not only can you increase your home equity in a hurry, you can save money over the long-term by utilizing your pre-payment privileges in one of the above 3 ways, or utilize all of them. Keep this in mind when you are considering getting a new mortgage, as there are “no-frills” products out there that have greatly reduced pre-payment privileges in exchange for discounted lower rates. This is also helpful if you are looking to reduce your overall personal debt load as you may want to look at refinancing your mortgage to pay off all or some of your consumer debt and then utilize your pre-payment privileges to pay down your mortgage faster, getting you debt free sooner! If you think insufficient home equity is stopping you from getting a mortgage, maximize your options by contacting an experienced mortgage professional with access to multiple lenders and explore all available options.
For all your mortgage needs, contact Jackie at 780-433-8412 or email@example.com. Stay in the loop by following on Twitter @Mortgagegirlca.