Regardless of how long you’ve
had your mortgage or how large or small the current balance is, there are a
variety of ways to make prepayments work for you to pay down your mortgage
faster and, therefore, pay less interest throughout the life of your
mortgage.
After all, each extra payment amount will reduce your
principal balance, which, in turn, reduces the amount of interest you’ll have
to pay on your borrowed mortgage amount.
Most lenders allow you to make a lump-sum payment of anywhere
between 10% and 25% of the value of your mortgage per year. The lump-sum
payment is based on either the original amount you borrowed or the amount
currently outstanding. Since mortgages decrease with each payment, it’s best
to negotiate a lump-sum payment option based on the original amount you
borrow. That way, if you come into an inheritance, a bonus or save some extra
money, you can pay down the largest amount possible.
Another factor to consider is when you can make a lump-sum
payment. Some mortgages allow prepayments throughout the year, while others
permit them only on the anniversary date. Still others allow you to make
prepayments on the day you make your regular payment.
If you can’t pay the maximum prepayment amount, it’s still
worth your while to at least make some form of extra payments, even if it’s a
few
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thousand dollars each year. That will still save you thousands
of dollars in interest payments throughout the life of your mortgage.
Another prepayment option involves taking advantage of
flexible payments. Most lenders allow you to increase your regular payment up
to a set maximum, such as 15%, while others allow you to double up your
payments.
If, for instance, you have a $1,000 per month mortgage payment
and increase it by 15% to $1,150, you could shave off as much as
five-and-a-half years on a $200,000 mortgage.
Even rounding up your mortgage payments a few dollars each
payment can help make your balance decline sooner. If you round up your
mortgage payment from, say, $766 to an even figure such as $800, you can feel
confident in knowing that every extra bit goes toward your principal.
You can also pay off your mortgage faster by moving to a
different payment schedule. Instead of making monthly payments, make them
biweekly or even weekly. Using an accelerated mortgage payment plan – where
you make payments every two weeks as opposed to twice a month – you actually
make one extra payment each calendar year. By paying more and paying faster,
you reduce your principal earlier, which lowers the amount of interest you
pay.
As always, if you have questions about paying your mortgage
off quicker, or other mortgage-related questions, I’m here to help!
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