The mortgage is singlehandedly the biggest investment and biggest fixed cost in our lifestyle (if you choose to have a mortgage instead of rent, that is). Mortgage, rent, and shelter constitutes the largest part of the household budget for most people. When we have a mortgage, we are bound to work to pay the mortgage, of course. Most of the time, people pay their mortgage according to the bank's schedule and think nothing more of it. However, if you think about the tens of thousands of dollars that end up going to the bank as the form of mortgage interest, you might want to think about different ways to pay off your mortgage earlier so that you and your family can reach financial freedom faster.
Make Two Half Payments instead of a Monthly Payment
According to Bankrate, making two half payments instead of a monthly payment can shave as much as 6 years off of a 30 year mortgage loan. The accelerated biweekly payment is a great way to pay off your mortgage and take off a few years from the total mortgage. It works especially well with those who get biweekly paycheques from their employer. With the two half payments, you'll barely notice that you are paying more to pay off your mortgage.
Re-Finance your Mortgage
This might be an option for you depending on how much time you have left on your mortgage term. If the mortgage savings outweighs the inevitable mortgage penalty for refinancing your mortgage, refinancing might not be a bad idea, especially in the absolute low-rate environment that we have had for the past couple of years (and more so recently). The low mortgage interest rate environment is not going to last (however, that's what the financial experts have been saying for the past couple of years). Yahoo Finance estimates that on average, people have refinanced their homes twice since 2009.
The key aspect to refinancing your mortgage to the lower rate is to ensure that you are paying the same amount of monthly payment per month. So with the lower cost of the mortgage, you should pay extra to knock down the principle and reduce the time you have to be paying the mortgage.
Make a Pre-payment
Pre-payments can take many different forms. For example, you could make a lump sum payment, or you can pay up the total amount of your mortgage payment (check with your mortgage's financial institution to see what your terms are). On the Financial Consumer Agency website created by the government of Canada, they give an example of a man with a $150,000 principle mortgage at at 5.45% rate over a 25 year amortization. With his pre-payment maximum, he was able to contribute up to 10% of his original mortgage loan, which is $15,000. With that, he was able to reduce his total mortgage by $33,000. One thing to be cognizant of is to make sure you don't pay more than the lender allows, otherwise, you will be subject to fees and fines of course.
Put your Tax Refund into your Mortgage
Finally, if it is difficult to find money for a pre-payment, one option is to use your tax return money towards your mortgage. Of course, most people like to treat themselves with the tax return proceeds, but if you divide it up into money for your 'splurge' and divide it up into money towards your home, that helps you use the money effectively for both 'fun' and 'mortgage pay down'. Doing this on an annual basis will save you thousands of dollars over the course of your amortization.
Although it might not seem like much, paying any little bit towards your mortgage saves you lot of money on your mortgage. This is because mortgages work with an amortization- that means that even though the mortgage payment stays the same every time you pay a mortgage payment, you are actually paying more interest than paying down the principal. That's why when you pay down your principal, you are actually chipping away at the base of the iceberg, rather than attacking it from the top (which is obviously less effective).
Bargainmoosers, do you have any other ways in which you saved on your mortgage?
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