Whether it’s your first major purchase or you are a veteran in the game, buying a home is always a big deal. But getting your mortgage paid off quickly is one of the smartest financial decisions you can possibly make. So, what are some of the most effective techniques you can use to achieve that mortgage-free life? Here are a few easy tips for paying off your mortgage faster.
Accelerated Bi-Weekly Payments
Instead of paying your mortgage every month 12 times per year, pay your mortgage every two weeks instead. By getting it paid off faster, the long-term benefits will outweigh the short-term pain in terms of extended interest rates.
Round Up Your Mortgage Payments
Another useful way of making your mortgage disappear faster is to round up your mortgage payments. Here’s an example: if your accelerated bi-weekly mortgage payments are $543, consider rounding them up to $600. The extra $57 will do wonders for your mortgage payment scheme and you may not even notice a difference in your monthly budget.
Likewise, if you are lucky and talented enough to be offered a raise at work, invest the extra money in your mortgage payments instead of splurging it on your lifestyle. Increasing those bi-weekly payments to $500 from $470, for instance, could cut years off of your amortization schedule.
Put ‘Found’ Money Towards Your Mortgage Payments
Sudden and unexpected sources of money – a birthday cheque from a grandparent or a bonus at work, for example – are sometimes called ‘found’ money. ‘Found’ money can be easily applied to your mortgage without any impact to your budget because it wasn’t money you were expecting to receive – it just came out of nowhere! Consider increasing your RRSP contributions – and then put your tax refund directly towards your mortgage repayments.
Make A Lump Sum Anniversary Payment
Most banks will allow you to make an extra mortgage payment each year, which is applied directly to the principal. Taking advantage of this by making a lump sum payment — even if it’s as small as $50 a year — is a great way to chip away at your mortgage.
Here’s an example: An annual lump sum payment of $300 on a $400,000 mortgage at 3.6 percent over 30 years will decrease your mortgage amortization by up to 4 years.
Of course, after you’ve secured a mortgage and have started paying it down, it can be really tempting to simply forget that it’s there because the payments are automatic. But here’s a tip: don’t stick your head in the financial sand. The better informed you are about interest rates and new mortgage options, the faster you will see your mortgage disappear.
Tak this example: let’s say that interest rates have dropped since you took out your mortgage a few years ago, but you are in the middle of a five-year fixed term plan with your bank. By understanding what the penalties are for breaking your mortgage, and reapplying for a lower interest rate, you could potentially save thousands of dollars over the long term.
Having said that, although paying down your mortgage quickly means smaller interest payments in the long term, it’s not always the best decision for every homeowner. If you have high-interest debt on a credit card, no emergency fund savings, or haven’t started saving for retirement yet, the interest you would save on your mortgage will not be as beneficial to you as confronting those other, more pressing financial challenges.
But armed with this information, you’ll be able to get that financial mortgage weight off your back in no time. The huge sense of freedom that an entirely debt-free brings is liberating, so take the time to do some calculations and figure out what options are right for you.