Blue Pearl Mortgage Blog

What options should you use to pay down your mortgage?

December 12, 2018| Posted by: Blue Pearl Mortgage Group

When securing a mortgage, there are several options you can consider to pay down the mortgage such as shortening the amortization period, double-up payments, lump-sum payments and/or changing your repayment terms from monthly to accelerated bi-weekly payments.

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Shorten the mortgage amortization period

If you can afford higher payments, consider a 15-year amortization period instead of the popular 25-year amortization period. It can be an enticing idea to know that you’ll be free of a mortgage in half the time and pay a lot less interest in the process.

Using a $200,000 mortgage as an example, the payment (P&I, Principal, and Interest, not including property taxes and Mortgage Insurance) is $951.04 at a 4% mortgage interest rate. You would pay a total of $342,374.40 over that 30 years. At the same rate, a $200,000 mortgage over 15 years would require a P&I payment of $1,476.08 at the same interest rate, and you'd pay a total of $265,694.40 over the life of the mortgage of 15 years.

If you can make those higher payments, it's a nice bonus to save around $76,000 over the life of the mortgage of 15 years.

Accelerated payments and other payment options

You can cut your mortgage time by five or more years if you change your payment schedule from monthly to accelerated bi-weekly payments. Instead of paying one monthly payment x 12, half of the payment amount is paid every two weeks. Because some months have five weeks, you end up paying the equivalent of an extra payment each year. It's a relatively painless way to save money over time and pay off your home sooner.

Most lenders use a percentage on the original mortgage balance as their lump sum prepayment privilege maximum. In other words, if you have a 15% prepayment lump sum option, on a $400K mortgage amount at the time of closing, the prepayment would be $60K per year (based on your  original mortgage amount) not the outstanding balance.

Double-up payments work the same way, allowing you to shave money off your principle balance and saving you thousands of dollars in interest over the lifetime of your mortgage.

What about “something else”  like your debt?

The ”something else” is taking a look at your other debt, especially your credit cards, store credit, and/or loans. Estimates vary from around $6,500 to over $9,000 for average credit card debt per household. Along with that, multiple sources report the average credit card interest rate rose to 15.59% in 2018.

A $7,500 total in credit card balances with a 15.59% interest rate would mean that $98 of your monthly payment goes straight to interest each month, not reducing the balance for that out-of-pocket expense. At almost $1,200/year in interest payments at interest rates often triple rates on a home mortgage, perhaps paying off debt is smarter than working on the mortgage.

If you go back to the comparison between a 15-year and 25-year mortgage, the increase in monthly payment is $524/month. Perhaps a far better plan would be to pay off that $7,500 in card debt by adding the $524/month to payments. You would be getting rid of that debt in a year or less. Then, you can start to work on extra payments toward your mortgage. Even if you took the approach of adding principal money to every house payment on the longer mortgage, you're decreasing a 4% or 5% debt with money that could be working down debt at a much higher interest rate.

There is a lot of data showing that the internet has shortened attention spans and has increased the desire of Canadians for immediate gratification. You’re certainly pushing out that gratification with these mortgage payment strategies, while you could be getting much faster gratification by paying off short-term higher rate debt. 

We are always here to work with you to tailor a plan that works best for your financial situation. Let's chat! It's your mortgage. It's your life.

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