Prepay early in the mortgage
Make extra payments as early as you can after getting a mortgage because the loans are interest-heavy up front and the faster you pay down your principal, the more interest savings you will accumulate over the long run. Within the first five to seven years of your mortgage is where the largest portions of interest payments are contained. This not only will save you thousands in interest payments but will also increase the speed in which you are growing equity in your property.
Make an annual lump sum payment
Whether you use your tax refund, receive an inheritance or get a Christmas bonus you should apply as much as possible directly to your principal. You will have to check your mortgage documents or ask your mortgage broker to find out how often you can prepay and what maximum percentage of your principal you are allowed to pay without penalty each year. Most companies allow 15% to 20% per year without penalty, while one or two may even allow up to as high as 25% on a closed mortgage.
If your payments go down, don’t lower the payment amount
If you are on a variable mortgage and the rates go down your payment will also go down. Instead of making the lower mortgage payments, call your lender and let them know that you would like to continue making payments for the original amount. You will have to check with them to see if there is a charge for making the extra payment. Even with the charge, in most cases, it is still worth it and will help you pay down your principal faster.
Keep track of your extra payments
It’s always important to make sure your payments are being handled properly. When your payments are set up on a monthly cycle there is always the chance that an untracked payment could be lost accidentally. You’d be surprised how often it happens. I suggest that when making an extra principal payment you should always print the screen when paying online or use a separate check and making a note in the memo line that the payment should be applied to the principal directly. A good time to check up on these payments and make sure that they have been applied correctly would be during tax time.
Once you’ve obtained your mortgage most people never take a look back and just keep making payments until their term is up. It is always important to stay up to date on interest rates and new mortgage products that can save you money. Something as simple as switching from your variable rate into your fixed rate could save you thousands in the long run or even paying off your credit cards through an Equity Line of Credit or a Home Equity Take Out.
Sometimes paying down your mortgage isn’t the right move
Even though in most cases paying down your mortgage as fast as possible is the best move, it may not be the best move for everyone financially. In the case where you have an extremely low interest rate you may be better off putting your money into a high yield investment with a higher investment rate.
This enables you to grow your money and use it to pay off a larger amount at one time. In some cases you can be paid out the interest on your investment every month, this payment could also be used towards helping with your mortgage payments. Another good time where you may want to hold off on making extra payments on your mortgage is when you are planning on moving.
This money may come in handy for a down-payment and closing costs for the new home or carrying costs should your current home take longer to sell.
Round up your payments even if it’s just a little
If your monthly mortgage payment is $776.22 and you were to round up your payment an extra $23.78 a month to $800, that’s less than a dollar a day, you would effectively reduce your mortgage amortization from 35 years to just over 32 years right away or from 25 years to just over 23 years.
Increase your payments with your pay increases
If your income increases, try not to keep your mortgage payments the same. Although the disposable income is a joy to spend on unnecessary luxuries in the short-term, the long-term benefits of being mortgage free faster and saving those interest payments will far outweigh the short-term joys. I tell my clients to just pretend that their income did not increase and to maintain the lifestyle that they are currently living.
Increase the frequency of your payments
If you make monthly payments and get paid bi-weekly, you should change your mortgage payments to coincide with your payday. Changing from Monthly to Bi-weekly accelerated creates an extra payment per year that goes to paying down your principal quicker and is unnoticeable to the average person. Speak with your mortgage broker about your specific case.
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