Purchasing and owning your dream home has been a top priority for many Canadians over the years. Yet, many of us we don’t have a real good understanding of how our mortgage works completely and as a result don’t proactively manage it. There are numerous ways you can cut tens of thousands of your mortgage by taking a few simple steps during the life of your loan.
Have you ever sat down and thought about how much you could save off your mortgage if you paid a little extra every month? It doesn’t have to be much, maybe an extra $50 here, or an extra $100 there. In the early years of a mortgage most of your payment is going to pay off the interest on the loan. However, with the currently low variable and fixed rates on the market, it is not uncommon to see 50% or greater of each mortgage payment going towards principal. Why not take even more advantage when the going is good so that if rates do increase, you have made the greatest possible impact to your mortgage debt. Every extra dollar you can put towards the principal will have a ripple effect through the entire life of the loan by reducing the total amount of interest you pay.
But wait, it gets even better! Suppose you find that you can send in a whole extra payment – you are basically now turning your fixed payment, say $1,000, into an investment tool. That extra payment is going to go against your loan principle and you are in effect earning whatever interest rate you are paying on your mortgage over the life of the mortgage in reduced interest charges. So if you are paying 3.00% and make an additional $1,000 payment you are in effect lowering the total amount you will pay on your loan by the compounded amount of that payment. Not a bad investment at all!
Most mortgages have pre-payment privileges of 10, 15, 20 and up to 25% each calendar year. Imagine the impact if you could pre-pay an amount greater than one penalty.
Another way to help shave off the amount of interest you pay over time is to consider splitting your monthly mortgage payment up into biweekly accelerated payments. This amounts to making an extra payment each year since there are 26 biweekly periods in a year.
Refinancing is another great tool to use during periods where the savings will outweigh the costs associated with it. This is an important point because lower interest rates alone do not always mean you will get a better deal. Many times you have to pay fees and closing costs on the mortgage itself which can quickly eat up any savings you realize with lowering your interest – this is especially true if you have some years under your belt repaying your mortgage already.
Do the math before you make the jump to see if it makes financial sense for you to refinance at current rates.
It is easy to take a proactive approach in making sure that your mortgage becomes a tool to owning the home of your dreams instead of a burden. Making a few smart financial choices can go a long way to helping you pay your mortgage down quicker than you ever imagined.
VERICO The Financial Forum Ltd.
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