Master your MortgageJuly 16, 2012
There are several factors that affect your mortgage and how much you end up paying: mortgage rates, payment frequency, amortization period, and extra payments. By managing these factors you can get the most out of your mortgage and pay the least amount of interest possible, becoming the master of your mortgage.
Choose a Shorter Amortization Period
The longer of an amortization period you choose, the more interest you pay and the longer it will be before you are mortgage free. For example, a mortgage of $270,000 over 25 years at 5% would equal monthly payments of $1,578 and $203,517 of mortgage interest paid over the life of the mortgage. By cutting 5 years off the amortization period your payment would go up just over $200 per month, but you would save nearly $50,000 in interest and be mortgage free 5 years early. What would you do with an extra fifty thousand, retire early?
Selecting biweekly mortgage payments instead of monthly or bimonthly payments equals two additional payments each and every year. This may not seem like much, but over the course of your mortgage it adds up. The same mortgage above, at 20 year’s amortization, with biweekly payments results in a fully paid mortgage 3 years earlier with $23,000 interest savings. For such a small change, biweekly payments produce big results. If you are keeping track, that’s $73,000 overall savings from the original mortgage and an 8 year reduction.
Paying more on your mortgage is always a good idea; particularly since any additional payment will go directly towards paying off your principle and not toward interest – which immediately and significantly reduces your amount owing. Look for mortgages that let you “bump” your monthly payment or pay in lump sums, many mortgages will let you do this each year up to 20% of your principle. A $1000 additional payment per year results in $12,000 in interest savings and being mortgage free 18 months early. Or, bump your payments by 10-20% each year as your income increases and reap the benefits of an even quicker payoff. If you also need to build up you retirement fund then contribute all you are able to your RRSP and take your tax refund and apply it to your mortgage for double the benefit.
If the current mortgage rate is less than the interest rate you are paying you may want to consider refinancing to lower your payments, reduce the amount of interest you pay, and reduce your amortization period. So how do you know when it’s a good time to refinance? It depends on how much you can save versus how much you need to pay to get out of your existing mortgage. Generally speaking, if you can save a minimum of one percentage point it may be worthwhile to refinance.
Put it all Together
By combining the above techniques – shorter amortization, biweekly payments, additional payments and refinancing mortgage rates – you can save $73,000 or more in interest costs and cut your mortgage repayment by 8 years or more. Take these tips to heart and become the master of your mortgage!