Ways to pay your mortgage off faster
A mortgage doesn't have to be a ball and chain. Incorporate some of these effective tactics into your mortgage strategy.
Increase your frequency of payments.
The most common mortgage payment frequency is monthly, but making smaller payments more frequently lets you chip away at your principal more quickly. You’ll pay less interest over the long run, too. Compare this $100,000 mortgage at 7% with a 25-year amortization.
Although you save a small amount with bi-weekly payments, you're still saving even though you pay slightly less annually. If you were to take a more aggressive approach with a weekly accelerated payment, you’d save a significant amount of money. You'll pay more annually (equal to one month more in payments each year) but the savings are substantial.
Round up your payments and cut down your principal
In the above example, if you decided to go with bi-weekly payments but rounded up each payment to $350 from $322.77, you'd save $22,500 and reduce your total amortization by over 4 years. Chances are, you won't even notice the slight increase to your payment and look at all you stand to gain.
Double up your payments
If you decide on a mortgage with flexible repayment options like an open mortgage, you’ll have a higher interest rate, but can experience considerable savings if you contribute increased payments. In a scenario similar to above, if you have a $100,000 mortgage at 9.25% (a higher rate for the open mortgage) for a 25-year amortization period, your payments will be $388.96 each bi-weekly period. If you doubled each payment you would save $119,964 and reduce your amortization period to just over six years! Wouldn't you rather do something else with all the money you save?
Happy anniversary contributions
Most mortgages allow you to make additional contributions on the anniversary date. Amounts vary, so be sure to check with your lender. Assume the mortgage example of $100,000 at 7% with bi-weekly payments. If you were to contribute 10% ($10,000) of your principal each year, you'd save $123,527 and shorten your mortgage amortization by 19 years. If you were to contribute $5,000 (or 5%) each year, you'd reduce your amortization by over 15 years and save $103,511.
Choose a shorter amortization period
Although 25 years is common, in our example above, if you reduced the amortization to 20 years and increased payments from $322.77 to $354.52., you'd save $25,451.41.
Make use of the money you've been putting in
When you want to purchase get-away property, take a dream vacation or make renovations to your home, you might put it off, waiting for a work bonus or an inheritance to come through. Why not take advantage of the money you've put into your mortgage through a home equity mortgage or line of credit? If the amount of your principal owing is less than 80% of what your home is valued at, you can make use of the equity you've established to enjoy other opportunities. A little vacation, perhaps?
Contact a BlueShore Financial financial advisor to learn more about how you can pay off your mortgage faster.