Paying Down Your Mortgage Faster
Everyone wants to pay off their mortgage sooner than later - Here are a few ways to help you and your clients do that.
Lump Sum Payments:
Unlike your regular monthly installments, all of the money goes toward reducing your principal. If you have no spare cash in your budget, you could still use other possible forms: A one-time bonus at work, an inheritance, gifts of money, or even your tax return.
Lump-sum payments can shave thousands of dollars on the interest on your mortgage and years on your amortization period (the amount of time it will take you to pay off your loan in full).
To use an example, making lump-sum contributions of just $2,400 per year (or $200 extra per month) on a $300,000 mortgage would save you $12,920 in interest and would shave an additional 4 years off your amortization in a 5 year period, assuming a five-year fixed-rate mortgage at 2.99 per cent interest rate and 25-year amortization. That means that after 5 years, your remaining amortization would only be 15 years and 9 months instead of 20.
Accelerating your mortgage payment:
The most painless way to ramp up your mortgage payments and shorten your amortization period is switching from monthly to accelerated bi-weekly payments. Here’s what that means.
In the above example of a $300,000 mortgage, your monthly payments would be $1,418. If you switch to a simple bi-weekly arrangement, your payment is calculated as $1,418 × 12 months/26 weeks = $654. You’ll be saving a little bit in interest but not much.
Accelerated bi-weekly payments, on the other hand, are calculated as follows: $1,418 × 12 months/24 weeks = $709. Your payment is slightly higher, covering the equivalent of a 13th monthly mortgage installment every year. Over time, that makes a substantial difference. It saves approximately $7700 in interest over 5 years and shrinks the amortization period by almost three years.