Paying off your mortgage faster has the excellent benefit of reducing the amount of interest that you pay on your mortgage. How? By using privileges provided by the lender.
There are two types of mortgages: open and closed mortgages.
With OPEN mortgages there are no limits as to how fast you can pay down your mortgage, however you do pay a higher interest rate for this privilege. Typically, this type of mortgage is used by real estate investors who know they are only going to hold the property for a short time. Their interest expense is also tax deductible.
CLOSED mortgages are the preferred choice for owner occupied property and also offers privileges for paying down the mortgage faster with the ultimate benefit of reducing the interest you pay over the life of your mortgage. These programs differ from lender to lender; at the end of the day you would not choose a lender based solely on this, but it is still a very relevant consideration.
• Annual or periodic lump sum payments: Payments of up to 15%, 20%, or even 25% of the original principal amount are allowed each year.
• Increase your payment: You may also increase your current payment by up to 15%, 20%, or even 100% each year.
• Double your payments: Some lenders also offer the option of doubling any and all payments.
The above options are “non-cumulative”: Lenders embrace a “use it or lose it” policy, meaning that if you do not use your 15% or 20% privilege in year one, you cannot make a 30% or 40% lump sum payment in year two. Passing up on privileges in any one year does not affect your privileges in future years.
• Accelerated or rapid payments: With each payment (weekly, bi-weekly, or semi-monthly) you apply a small incremental amount of money directly to the principal. This privilege is designed so that every 12 months you make the equivalent of 13 payments.
An example of how taking advantage of even one of these privileges can save you thousands is easily illustrated with the Accelerated Payment Privilege. On a $280,000 mortgage that is amortized for 35 years at 5.3%, the regular bi-weekly payment would be $671.54. The accelerated bi-weekly payment would be $728.36. This would allow you to pay your mortgage off in 28.4 years. Using a constant interest rate, you would save $73,068 in interest expense.
Or, if you were to make a lump sum payment of 2% each year on that same mortgage and just make regular payments, you would pay off the mortgage in 19.75 years and save $161,451 in interest expense... all for an investment of only $5,600 each year, and you would be mortgage free 15.25 years earlier!
Do you want to pay off your mortgage faster? A small investment every month, or even a slightly larger one annually, will ultimately save you tens of thousands of dollars. A tiny investment with a huge dividend. That’s the impact of compounding interest.
We wish to recognize this article contribution by Brian Gentles AMP of the Home n Work Mortgages national network of mortgage consultants.
Under our ‘shared knowledge’ concept intellectual property is shared within our organization for all and recognition is given for the one making the contribution.’
Rebecca joins the team with over 20 years of business, investment and real estate experience. A true advocate for the consumer, Rebecca brings you unparalleled integrity with unbiased advice. Phone anytime and discover for yourself just how easy and enjoyable the mortgage process can be.
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