Debra Williams BBA
May 2011...Money-saving tips for your mortgage
Most of us feel that we have the right mortgage for our situation, but we certainly don’t want to think about the cost of that borrowing. The good news is that there are ways to save money over the life of your mortgage and during your mortgage years. Here are some tried-and-true money-saving mortgage strategies.
Increase your payment frequency: If you’ve been renting, you likely paid your housing costs once a month. But with a mortgage, you can also pay weekly (52 payments), bi-weekly (26 payments), or semi-monthly (24 payments). You make additional payments with weekly and bi-weekly versus monthly or semi-monthly, which shortens your amortization period and reduces the amount of interest you pay over the long run.
Example: A $200,000 mortgage amortized for25 years at 4.5%. Adjust payments from monthly to every two weeks (bi-weekly or 26 payments), and you’ll reduce your amortization to 21.7 years and save $20,033 in interest.
Shorten your amortization: If you have the cash flow, you could shorten the number of years it will take for you to pay off your mortgage. A shortened amortization means higher mortgage payments, but you will pay less interest overtime.
Example: $200,000 mortgage amortized for 25 years at 4.5%. Switch to 20 years, and you’ll pay off your mortgage 5 years earlier and save $29,488 in interest.
Some homebuyers often use extended amortizations as a safety net. They may choose a 30 year amortization for their mortgage, but they keep their payments at 20 or 25 years. This gives them the flexibility to reduce their payments at any time should they need more breathing room during a maternity leave, or in the event of a job loss or illness.
Use your pre-payment privileges: Those privileges are there for a reason– they help you pay off your mortgage faster and reduce your interest costs. Pre-payment privileges differ from lender to lender. Take the 20+20 option. Once a year, you can increase your mortgage payment by up to 20%. The second 20 lets you make a lump sum payment of up to 20% each year.
Example: $200,000 mortgage amortized for 25 years at 4.5%. Put $2,000 lump sum amount each year on your mortgage and you’ll pay off your mortgage in under 20 years and save $32,629 in interest costs.
Roll high-interest debt into your mortgage: You can use the equity in your home to consolidate your other high interest debt such as credit cards or store cards. By consolidating all of your debt into a new mortgage, you can make fewer payments, save money on interest costs, and improve your cash flow. In almost every case, you’re better off holding your debt in a mortgage than in any other lending vehicle. Why? Because Canadian homeowners are benefiting from mortgage rates that are among the lowest in decades. You can then consider using the money you save each month to pay off your mortgage faster. Or use the savings for investing, RRSPs or RESPs.
If you are interested in exploring ways to pay off your mortgage sooner, we can review your mortgage and offer suggestions to maximize your savings.
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