How To Pay Off Your Mortgage Early In Canada
The first few years of your mortgage term can be quite depressing as most of the money youre paying is going toward interest and not toward building equity. This will of course change as the years go on, but if youre interested in building your equity faster, there are a few things you can do.
Accelerated Payment Option
The average homeowner typically makes monthly mortgage payments, so 12 payments in a year. This means that if your mortgage payment is $1,500 youre paying $18,000 toward your mortgage every year.
This is where the accelerated payment option can help you shave years off your mortgage term. The accelerated payment option allows you to make half-payments every two weeks. One full year can be broken up into 26 two-week periods this means youll make 26 $750 mortgage payments in one year which equals $19,500.
There you go, you can accelerate your mortgage payments by $1500 every year and youll barely even notice it.
Consider Lump Sum Payments
A mortgage is a long-term commitment, typically 25-30 years. This means that smaller extra payments really do add up in the long run. This is great for you because it means you can add an extra $100 here and there over the course of 30 years or you can devote bonuses or income tax refunds to paying off your mortgage quicker.
Speak With Your Mortgage Lender
Why You Should Get Pre
oobas pre-approval allows you to check your credit score and assess how much you can afford.
Shop with confidence
Knowing your credit score allows you to address any issues before applying for a home loan.
Know how much you can afford
ooba considers your financial information in the same way a bank would, to give you an accurate assessment of what you can afford.
Get the competitive advantage
Sellers are more likely to accept an offer from someone who has proof that they can afford to buy.
Sign a sale agreement with peace of mind
Pre-approval protects you from putting in an offer on a property you cant afford. Why risk disappointment?
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Precautions When Setting Up Biweekly Payment Plans
Unfortunately, switching may not be as simple as writing a check every two weeks. If you are already on an automatic payment plan, you will need to find out from your lender if you can cancel or change it. You will then need to find out if your lender will accept biweekly payments, or if there is a penalty for paying off your mortgage early.
Some services offer to set up bi-weekly payments for you. However, these companies may charge you a fee for the service , and they may only make the payment on your behalf once a month .
Instead, you should make the payment directly to the lender yourself, and you must be sure that it will be applied right away and that the extra will be applied toward your principle.
As long as you have strong will, it’s better to make the payments directly instead of signing up for an automatic payment plan since it will give you more flexibility in case of lean times.
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Apply Extra Money Toward Your Principal Balance
Applying extra money toward your principal balance is another easy way to get ahead on your mortgage. Every time you make a payment, a portion goes toward the interest, and the remainder goes toward the principal. If you can afford it, apply extra money toward the principal balance each month. Doing so will help you pay off your loan quicker and save you money on interest.
Benefits Of Paying Off Your Mortgage Early
Owning a home without a mortgage is financially liberating. Here are just a few of the key benefits:
- You save money. By paying off your mortgage you eliminate interest costs. This lowers your monthly expenses and reduces the total cost to own your home.
- No interest is better than a mortgage tax deduction. If you keep the mortgage to get the tax deduction then you’re paying $1 to the bank to get a $0.25 tax deduction . You’re still out $0.75. If you pay off the mortgage, you pay $0.25 in taxes and have $0.75 in your pocket.
- You will gain the flexibility of using what had been the mortgage payment to invest in retirement or save toward other financial goals. Imagine! Not only will you avoid paying mortgage interest, but you’ll be making money in higher-yielding accounts!
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Calculate Your Payment And More
|Loan Type||Purchase Rates||Refinance Rates|
|The table above links out to loan-specific content to help you learn more about rates by loan type.|
Shop Around To Get The Lowest Refinance Rates
If you decide to refinance, be sure to maximize your savings by comparison shopping.
Interest rates can vary by half a percent or more between lenders which equates to a major difference in your monthly payments and longterm cost.
Todays mortgage rates are so low that refinancing might make sense for you now, even if it did not a year ago.
Check with several competing lenders to make sure youre getting the best deal.
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Do Extra Payments Automatically Go To Principal
The interest is what you pay to borrow that money. If you make an extra payment, it may go toward any fees and interest first. … But if you designate an additional payment toward the loan as a principal-only payment, that money goes directly toward your principal assuming the lender accepts principal-only payments.
Why Is Amortization Important
Remember, an amortization schedule shows you how much of your monthly payment goes toward principal and interest. It helps you see a full view of what itll take to pay off your mortgage.
As with any type of goal setting, an amortization table gives you a game plan and the confidence to take on the mammoth task of paying off your house.
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Mistakes To Avoid When Paying Off Your Mortgage Early
If you can afford to pay off your mortgage ahead of schedule, youll save some money on your loans interest. In fact, getting rid of your home loan just one or two years early could potentially save you hundreds or even thousands of dollars. But if youre planning to take that approach, youll need to consider if theres a prepayment penalty, among other possible issues. Below are five mistakes that you should avoid when paying your mortgage off early. A financial advisor can help you figure out your mortgage needs and goals.
Understand And Utilize Mortgage Points
Whenever people are curious about how much their mortgages cost are going to cost them, lenders will provide them with quotes that include loan rates and points. Stephanie McElheny, the Assistant Director of Financial Planning at Hefren-Tillotson in Pittsburgh, says that one point is equal to 1 percent of the loan amount .
McElheny adds, there are two kinds of points, discount and origination fees:
- Discount: prepaid interest on the mortgage the more you pay, the lower the interest rate.
- Origination fee: charged by the lender to cover the costs of making the loan.
If you plan on staying in your home for the foreseeable future, it may be worth paying for these points since youll end-up saving money on the interest rate of your mortgage. You could save that extra cash each month and put it towards your overall mortgage payment.
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How To Reduce The Overall Cost Of Your Mortgage
If the above two options arent accessible to you, know that there are other things you can do. If your primary goal is to save money, you can look for ways to lower the cost of your mortgage, without paying it off in full. That would leave you with extra money for investing. Here are eight ways to do that:
Consider An Offset Account
An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
For example, for a $500,000 mortgage, $20,000 in an offset account means youre only charged interest on $480,000.
If your offset balance is always low , it may not be worth paying for this feature.
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Retiring A Mortgage With Extra Payments
Many homeowners invest in home security systems to protect their property and personal assets. However, a security system will not protect the homeowner against financial disaster or bankruptcy. Making additional mortgage payments will shrink the total amount of interest paid over the life of the loan, and the borrower will pay off the debt more quickly. In addition, the home equity will grow at a faster pace when extra payments are applied to the loan. This provides for a margin of protection by lowering the interest costs. This method gives the property owner a home free and clear of debt. More payments on the principal of the loan equate to assets earning interest at the same rate as the interest rate on the loan.
Pay Attention To When Youre Charged Interest
Most standard mortgages in Canada charge interest semi-annually. That means twice a year the lender calculates the interest you owe, based on the outstanding principal debt and the accumulated interest on outstanding debt. This is known as semi-annual compounding interest . The rate at which compound interest grows depends on the frequency of compounding. The higher the frequency , then the greater the compound interest. For that reason, a loan with an interest rate of 10% compounded annually will actually accrue less interest than a loan with 5% interest that is compounded semi-annually, over the same time period.
Principal And Interest Of A Mortgage
A typical loan repayment consists of two parts, the principal and the interest. The principal is the amount borrowed, while the interest is the lender’s charge to borrow the money. This interest charge is typically a percentage of the outstanding principal. A typical amortization schedule of a mortgage loan will contain both interest and principal.
Each payment will cover the interest first, with the remaining portion allocated to the principal. Since the outstanding balance on the total principal requires higher interest charges, a more significant part of the payment will go toward interest at first. However, as the outstanding principal declines, interest costs will subsequently fall. Thus, with each successive payment, the portion allocated to interest falls while the amount of principal paid rises.
The Mortgage Payoff Calculator and the accompanying Amortization Table illustrate this precisely. Once the user inputs the required information, the Mortgage Payoff Calculator will calculate the pertinent data.
Aside from selling the home to pay off the mortgage, some borrowers may want to pay off their mortgage earlier to save on interest. Outlined below are a few strategies that can be employed to pay off the mortgage early.:
When To Consider Loan Recasting
In some cases, if you make a large enough mortgage payment, your lender might offer to recast your loan. If youre not aware of this, you may actually ask your lender for recasting.
Mortgage recasting is when you pay a large amount toward your principal balance, which is then reamortized to reflect the remaining balance. Basically, your lender recalculates the remaining balance into a new amortization schedule. You might want to consider recasting if you happen to have large funds from inheritance pay or a windfall from a side-business.
Under the law, only conforming conventional loans can be recasted. This excludes government-backed loans such as FHA loans, USDA loans, and VA loans. Majority of jumbo loans also do not qualify for recasting. To be eligible for recasting, you must have a pristine record of timely mortgage payments and enough lumps sum funds.
Homeowners usually recast their loan to reduce their monthly payment. Like refinancing, recasting decreases overall interest charges. However, it retains your original repayment schedule and interest rate. This means if you have 25 years left to pay, your monthly payment will be lower, but your loan term will still be 25 years. It does not actually shorten your payment term. But its worth it to have lower monthly payments.
To give you a better idea, heres an example below. Lets say you received an inheritance payment worth $200,000. If you happen to have a new loan worth $300,000, you can try recasting.
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Break It Down And Get Serious
Since paying off your mortgage faster is completely up to you and your financial decisions, its always a good idea to find motivation from somewhere. It could be from anywhere, but typically we find that seeing the numbers laid out in front of you is one of the best motivators. Heres a breakdown of how quickly youll be able to pay off your mortgage when taking into account the above tips.
The example were going to use is a $350, 000 mortgage with a 30 year amortization period.
In total thats an extra $10,600 for extra payments every single year. If this isnt enough motivation to get serious then we dont know what is. While we do understand that the process of finding an extra $10,600 a year would be very hard, if paying off your mortgage as soon as possible is important to you, we know youll find a way to do it.
What Documents Can You Expect
The documents you receive may depend on your loan servicer. Heres what you can expect, which documents are essential and which ones you can make do without.
If you dont have proof within about 90 days that the certificate of satisfaction has been recorded, you may need to contact your loan servicer and speak with the lien release department.
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Two Benefits Of Making Extra Mortgage Payments
As you may know, making extra payments on your mortgage does NOT lower your monthly payment. Additional payments to the principal just help to shorten the length of the loan . Of course, paying additional principal does, in fact, save money since youd effectively shorten the loan term and stop making payments sooner than if you were to make the minimum payment. However, that only happens after a certain period of time.
If you have an extra mortgage payment plan that will end your mortgage within a timeframe that lets you enjoy five years or longer of mortgage-free living, that makes more sense, says Sullivan.
So what is the effect of paying extra principal on a mortgage?
The Mortgage Payment Schedule With Extra Payments
The calculator supports schedules with:
- a specific number of additional payments or
- extra payments until you’ve paid off the loan or
- extra payments at a different frequency than the “regular payment” – try making two extra payments a year or
- additional payments on dates other than a scheduled date or
- a single lump-sum extra payment on any date
Also, take a moment to study the mortgage payment schedule. Observe the lines where you’ve paid an extra amount. Notice that 100% of the amount gets applied to the principal balance. But if you are auditing your lender, they must apply the payments in the same way if you want to maximize your interest savings. Some lenders may not do this, particularly if you make the extra payment on a date other than a scheduled due date.
Interestingly, a lot of online calculators are not capable of making the correct calculation either. That’s why this calculator is the real deal!
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Reasons To Pay Off Your Mortgage First
The single-biggest reason to prioritize paying down your mortgage is that it saves you money.
Every time you make a mortgage payment, that payment is split into two distinct parts: the principal and the interest. The principal is the amount of money you borrowed and still owe. So, if you borrow $100,000 and repay $25,000, then the principal owed is $75,000. The interest is the fee you pay to the lender in order to borrow that money. Its the cost you pay to use someone elses money to buy an asset.
In general, the interest on a mortgage loan is expressed as a percentage. And the calculation of how much you owe is amortizedmeaning the period of time youre paying it back. This enables the lender to calculate the expected earnings of their risk , as well as establish a timeline for when the loan will be repaid in full. Plus, it helps you and your lender determine how much interest will be paid during the total lifetime of the loan. The most common amortization schedule for new mortgage loans in Canada is 25 years, although you can drop it down to five years or, in some cases, increase it to more than 25 years.
Now, anyone with access to a simple mortgage calculator will point out that reducing the number of amortization years will prompt an increase in your monthly mortgage payments. So for that reason, this isnt a viable option for many homeowners.