Save thousands of dollars in interest – pay off your mortgage early

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Guest Post – Michael Edmondstone

Your home mortgage is one of the biggest expenses you’ll have in your lifetime.  While some good arguments have been made about the advantages of making investments over paying down your mortgage early, the simple fact of the matter is that this strategy is much more financially risky for most homeowners, as a failed investment could lead to foreclosure on your home. But perhaps an even better—more immediate—reason to pay off your mortgage early than simple peace of mind is that you will save thousands of dollars in interest in the long-run.

Think about it. When you make a mortgage payment, the money is first used to pay off the interest you owe, not the principal that you borrowed. Especially in the first few years of your loan, most of your payments go toward paying interest, not reducing your principal. According to the Financial Consumer Agency of Canada, this means that over the course of a typical 25-year mortgage, most homeowners end up paying about twice the amount they originally borrowed. Make sure you’re not losing out on your hard earned cash; pay off your mortgage as quickly as possible with these four strategies:

 

1)      Increase Your Payments

This is the simplest strategy you can use to pay your mortgage off faster.  Closely examine your budget and see if you have any extra money that you can apply toward your mortgage payments. Even making an additional payment of $50 a month could help you save tens of thousands of dollars in interest payments and shorten the life of your loan by a few years. Just be sure you’ll be able to pay the higher rate for the rest of the term—you won’t be able to lower the rate again until a new term begins. Use BankRate.com or another mortgage payoff site to help you calculate your payments and your potential savings.

 

2)      Make One Extra Payment Per Year

Another way to pay off your mortgage faster is to enrol in an accelerated payment plan. These plans essentially allow you to make one extra payment per year by increasing the frequency of your payments. For example, instead of making 12 monthly payments of $1,000 (for a total of $12,000 paid), enrol in an accelerated bi-weekly payment program and make $500 payments. Because there are 52 weeks in a year, you’ll end up making 26 payments for a total of $13,000. The extra $1,000 you pay over the year will help you shorten the lifespan of your mortgage.

 

3)      Make Prepayments

If you’ve been fortunate enough to come across some extra money—a work bonus, a good investment, an inheritance, etc.—use it to make a prepayment at the beginning of the year. These lump sum payments allow you to pay off your mortgage faster by reducing your outstanding balance and the amount of interest you pay over the life of your loan. Review the terms and conditions of your mortgage agreement to see if prepayment is an option. You should also check with your mortgage lender to see if there is a minimum payment amount, and whether any fees or penalties will be assessed for prepayments.

 

4)      Refinance or Renew Your Mortgage at a Lower Rate

At the end of your mortgage term, browse the current Mortgage Rates and consider refinancing or renewing your loan for a lower interest rate. Although lower interest rates technically mean that you can make smaller payments, use the opportunity to get ahead by paying the same amount each month. As a general rule, refinance your mortgage only if you can lower your interest rate by at least one percent.  Do some comparison shopping to find the best mortgage rates before you refinance.

 

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Category: Financial freedom