Mortgage Prepayments
Mortgage prepayments allow you to make payments towards the principle balance of your mortgage. This allows you to pay down your mortgage faster. Some companies offer zero prepayment options, while other banks allow you to make prepayments only on the anniversary date of your mortgage. A savvy mortgage holder will look for a bank that offers large annual prepayments, and the ability to make prepayments on any payment date. If you pay an extra $200 a month on a $200,000 mortgage the following will occur:
Mortgage Balance: $300,000
Interest Rate: 3.5%
Amortization: 35 years
Monthly Mortgage Payment: $1235.49
Lump sum payments of $2400 for 5 years.
By making prepayments, the amount of time it will take to pay off your mortgage has been reduced by 2 Years and 4 Months.
This also represents a savings of $23,045.17 in interest.
This is clearly huge savings that only 10% of people with a mortgage take advantage of. A lot of unique techniques have been developed to make use of the prepayment option to help you reduce the interest paid using prepayments.
Increasing your Mortgage Payments
When you first get a mortgage, your payments should be a large portion of your income; however, as your property increases in value and your income increases in value, you should find that your mortgage payments are less and less of your disposable income. Many mortgage products do not allow you to increase your mortgage payments or limit how much you can increase your mortgage payments; however, by taking advantage of the ability to increase your mortgage payments, this may save you tens of thousands of dollars in interest. For example if you increase your payments by 20%, how much can you save?
Mortgage Balance: $300,000
Interest Rate: 3.5%
Amortization: 35 years
Monthly Mortgage Payment: $1235.49
With mortgage payments increased by 5% annually you will have the following results:
By increasing your mortgage payments by 5% annually for 5 years, the amount of time it will take to pay off your mortgage has been reduced by 10 Year(s) and 6 Month(s). This also represents a savings of $68,239.85 in interest.
Most people expect that they will receive an annual pay increase by approximately 2-5%, so by matching your pay increases to your mortgage, this will allow you to see a substantial savings in your mortgage interest paid.
Double-Up Payments
Some lenders allow you to make a double payment once or multiple times a year. This doubled-up amount goes directly to principle paying down your mortgage by this amount. If this is done regularly, then this can save you a ton of money in interest. Using the same example, we will assume that a double-up payment is used once a year.
Mortgage Balance: $300,000
Interest Rate: 3.5%
Amortization: 35 years
Monthly Mortgage Payment: $1235.49
Double-up payments done once a year for five years.
By making double-up payments, the amount of time it will take to pay off your mortgage has been reduced by 1 Years and 3 Months.
This also represents a savings of $12223.29 in interest.
Portable Mortgage Feature
A portable mortgage allows for you to transfer your mortgage from one property to another without having to discharge your current mortgage and reapply for a new mortgage. If your mortgage is not portable, then if you decide to sell your house, you will have to pay the prepayment penalty to discharge your mortgage. This also means that you will loose your existing interest rate on your current mortgage. If the rates are not favourable, then this could cost you tens of thousands of dollars in interest. With a portable mortgage, you can transfer the mortgage to a new property even if the mortgage size will increase, decrease, or stay the same. Regular applicable home purchase costs will apply like legal costs, appraisal fees, etc.
Assumable Mortgage Feature
If you are moving and you do not want to take your current mortgage with you, or if you are selling and do not plan on buying another property, then having the assumable mortgage feature is important. An assumable mortgage will allow the buyer of your property to assume the mortgage that you already have on your property as long as they meet the qualifications of your current lender. This will allow you to get out of your mortgage without having to pay any penalties to do so. Also, if your mortgage interest rate is lower than the current rates for mortgages, then this could be a great selling factor for your property.
Also, just because someone has assumed your mortgage, this does not necessarily mean that you are not responsible for your mortgage any longer. You need to speak with a lawyer in order to get a release from the property. This will ensure that you have no legal liability for the property after you have sold the house.
Early Renewal Option
If mortgage rates drop to an interest rate that is much lower than the interest rates you have on your mortgage, then it may be in your best interest to renew the mortgage early. If you have this ability available on your mortgage, then it will allow you to lock in a lower interest rate even if your mortgage is not up for renewal. Sometimes you may have to pay a prepayment penalty to do this, and other times you may not have to pay anything to renew your mortgage. By having this option available on your mortgage, it could allow you to lock in an interest rate that is a lot lower than the rate at your regular maturity date.
Rainy Day Option
We all know that life can change in the blink of an eye. With this, sometimes we run into a situation in life where we need the money for other things instead of our mortgage payments. If your mortgage has a rainy day option, then it allows you to skip a mortgage payment and add it on to the end of your mortgage term. This will usually increase the amount of interest you pay over your term; however, it will get you out of a bind if something comes up.
It is always a good idea to use your prepayment option to put this money back onto the mortgage principle as soon as possible to limit the amount of interest that you pay on your mortgage.
Accelerated Payments Option
Most lenders will allow you to make accelerated payments with your mortgage. Accelerated payments allow you to make 2 extra payments a year, and these extra payments go directly to principle. This allows you to pay down your mortgage a lot faster and saves you a lot more on interest. It is fairly common to have the ability to accelerated your payments on either weekly or bi-weekly payments.
When deciding on a lender to go with, other than what is your interest rate, you should be asking questions about the features of your mortgage. If the lender does not offer the variety of features that you need in order to allow you to maximize on your mortgage, then you should consider looking at a different lender for your mortgage. As we saw earlier, by having a basic mortgage, it limits the amount of techniques that you can use to pay down your mortgage faster. By having a slightly higher interest rate, it may save you tens of thousands of dollars over the term of your mortgage by having these features available.
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