If you put a little thought and planning into your
“mortgage strategy” you could save tens of thousands during the course
of your loan. Here are three ways to help you get mortgage free faster.
Payment Frequency:
Payment frequency simply refers to how often you will make mortgage payments or
the frequency with which you make installments. There are several options when
it comes to payment frequency, but one in particular, accelerated bi-weekly payments,
will help you pay down your mortgage much faster.
You may have heard of bi-weekly payments, you may even
be making bi-weekly payments, but do you have the right kind of bi-weekly payments?
Here is an explanation of the right kind of bi-weekly payments and some key differences
to be aware of...
Bi-Weekly Payments: (The wrong kind)
This option does not make a huge difference to the life of your mortgage. Assume
you have a payment of $1,000. The $1,000 a month payment is multiplied by 12,
the number of months in the year, and then divided by 26. This equates to a bi-weekly
payment of $461.54 which means that at the end of the year you will have paid
exactly $12,000! No different than if you had made 12 equal monthly payments of
$1000.
A very small amount of savings are gained due to half
of your payment being made early each month. The main reason for choosing this
option would be the convenience of matching your payment to your pay days.
Bi-Weekly Accelerated Payments: (The right kind!)
This option does make a huge difference to the life of your mortgage. With the
accelerated payments option, payments are exactly half of a monthly payment amount
and are collected every two weeks. This means exactly every 14 days, not the 15th
and 30th of the month. For example if the monthly payment is $1,000, the bi-weekly
accelerated payments will be $500. This will mean that over the course of the
year you will pay 26 payments of $500 or $13,000 in total.
How does this make such a big difference?
Payments are made on the same day every 2nd week. For example at the time of writing
this article, March of 2007, the payments would come out on say every Friday.
This would mean payments on March 2nd , 16th and 30th. That would mean during
the month of March you would actually have 3 bi-weekly payments made. This would
happen only during 2 months of the year, but does equate to one extra full monthly
payment per year.
Stated another way:
If you pay $1,000 per month X 12 months = $12,000 in
payments for the year, but if you pay accelerated bi-weekly then it is $500 X
26 = $13,000.
The amount of interest is the same, therefore, the
additional payment of $1,000 (or the amount equal to one full monthly payment)
will be deducted directly from the balance owing on your mortgage each year. This
coupled with the fact that you are making more frequent payments will quickly
lower your principle balance and thus the amount of money you are paying interest
on.
Additional Payments:
Most lending institutions will allow you to make additional payments. This can
mean a one time lump sum payment, or several lump sum payments throughout the
year. Often this can be done in conjunction with your regular mortgage payments.
You may have heard of “Double up” payments. This simply means doubling
the amount of your payment for as long as you wish. ($2,000 per month instead
of the usual $1,000). The total amount you can pay additionally in a year will
vary, but can not exceed the pre-payment privilege for that year. The pre-payment
amount is always pre-set and ranges typically from 10% to 25% per year.
Shortened Amortization:
At the end of each mortgage term, you have a renewal date. If interest rates at
this time are about the same as they were when you first got your mortgage, or
even lower, then you should consider decreasing your existing amortization period.
A reduction in your amortization means a shortening of the total length of time
it takes to pay off your loan.
All the amortization really does is determine your
monthly payments. The larger you choose to make your payment amount, effectively
the smaller the length of time (amortization) it will take to pay off your total
debt. Renewal time is always the best time to consider switching your mortgage
to another lending institution. A mortgage broker will be able to obtain a better
interest rate than you can negotiate by your self, so it is often best to consult
a broker. This should be done approximately 4 months before your renewal date
to guarantee the lowest rate at the time of renewal.
