If you put a little thought and planning into your “mortgage strategy” you could save tens of thousands during the course of your loan. Here are three ways to help you get mortgage free faster.
1. Payment Frequency:
Payment frequency simply refers to how often you will make mortgage payments or the frequency with which you make installments. There are several options when it comes to payment frequency, but one in particular, accelerated bi-weekly payments, will help you pay down your mortgage much faster.
You may have heard of bi-weekly payments, you may even be making bi-weekly payments, but do you have the right kind of bi-weekly payments? Here is an explanation of the right kind of bi-weekly payments and some key differences to be aware of…
Bi-Weekly Payments: (The wrong kind)
This option does not make a huge difference to the life of your mortgage. Assume you have a payment of $1,000. The $1,000 a month payment is multiplied by 12, the number of months in the year, and then divided by 26. This equates to a bi-weekly payment of $461.54 which means that at the end of the year you will have paid exactly $12,000! No different than if you had made 12 equal monthly payments of $1000.
A very small amount of savings are gained due to half of your payment being made early each month. The main reason for choosing this option would be the convenience of matching your payment to your pay days.
Bi-Weekly Accelerated Payments: (The right kind!)
This option does make a huge difference to the life of your mortgage. With the accelerated payments option, payments are exactly half of a monthly payment amount and are collected every two weeks. This means exactly every 14 days, not the 15th and 30th of the month. For example if the monthly payment is $1,000, the bi-weekly accelerated payments will be $500. This will mean that over the course of the year you will pay 26 payments of $500 or $13,000 in total.
How does this make such a big difference?
Payments are made on the same day every 2nd week. For example at the time of writing this article, March of 2007, the payments would come out on say every Friday. This would mean payments on March 2nd , 16th and 30th. That would mean during the month of March you would actually have 3 bi-weekly payments made. This would happen only during 2 months of the year, but does equate to one extra full monthly payment per year.
Stated another way:
If you pay $1,000 per month X 12 months = $12,000 in payments for the year, but if you pay accelerated bi-weekly then it is $500 X 26 = $13,000.
The amount of interest is the same, therefore, the additional payment of $1,000 (or the amount equal to one full monthly payment) will be deducted directly from the balance owing on your mortgage each year. This coupled with the fact that you are making more frequent payments will quickly lower your principle balance and thus the amount of money you are paying interest on.
2. Additional Payments:
Most lending institutions will allow you to make additional payments. This can mean a one time lump sum payment, or several lump sum payments throughout the year. Often this can be done in conjunction with your regular mortgage payments. You may have heard of “Double up” payments. This simply means doubling the amount of your payment for as long as you wish. ($2,000 per month instead of the usual $1,000). The total amount you can pay additionally in a year will vary, but can not exceed the pre-payment privilege for that year. The pre-payment amount is always pre-set and ranges typically from 10% to 25% per year.
3. Shortened Amortization:
At the end of each mortgage term, you have a renewal date. If interest rates at this time are about the same as they were when you first got your mortgage, or even lower, then you should consider decreasing your existing amortization period. A reduction in your amortization means a shortening of the total length of time it takes to pay off your loan.
All the amortization really does is determine your monthly payments. The larger you choose to make your payment amount, effectively the smaller the length of time (amortization) it will take to pay off your total debt. Renewal time is always the best time to consider switching your mortgage to another lending institution. A mortgage broker will be able to obtain a better interest rate than you can negotiate by your self, so it is often best to consult a broker. This should be done approximately 4 months before your renewal date to guarantee the lowest rate at the time of renewal.
To learn more go to the www.unisourcemortgage.ca and utilize the on-line help or send us an e-mail with your specific questions.
Gordon Ross, B.Sc., AMP
Unisource Mortgage Corporation
For more information please go to
www.unisourcemortgage.caArticle Source: http://www.ArticleSphere.com
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