Monday, January 5, 2009

Become "Mortgage-Free" Sooner

Paying off your mortgage the traditional way could take anywhere from 25 to 40 years and would end up costing around twice the amount you paid to buy it in the first place. That doesn't sound like a great deal does it ? (still better than paying rent though !)

Here are some effective ways to pay off your mortgage sooner, build equity faster and save thousands of dollars in interest:

1) Change Your Payment Frequency

By simply increasing your payment frequency from monthly to biweekly or weekly can save thousands of dollars alone over the course of your mortgage. The best thing about this option is that it costs nothing to do - no service charges or administrative cots (and if it does, then you got the wrong mortgage advice). If you can afford to pay a little extra in the year then this would be the perfect way to do so without any penalty.

The way this works is by dividing your monthly payment in two or four and paying faster. There are 12 monthly payments in the year BUT there are 26 biweekly or 52 weekly periods so ... you pay the equivalent of one extra monthly payment per year without a penalty.

2) Take Advantage of Prepayments

I know, I know ... where are you going to find any extra money nowadays ? Well, it doesn't have to be a lump sum of thousands of dollars at once in order to take advantage of this feature.

Most mortgage lenders allow prepayments as low as $100.00 and will automatically deduct it from your preauthorized bank account. You may have to give them something in writing to do so - they'll need your written OK for their files -
but that's the extent of the hassle. If you did this once a month instead of trying to save up a bigger amount then you'd be surprised how easy it fits into your budget and how fast you see the difference.

Remember: Your mortgage is a very long term contract so reducing it visibly in a month or two is not realistic and shouldn't get you down. As a matter of fact, even if you only make one single $100.00 extra payment then you'll be miles ahead of most Canadians! Most people don't bother making any prepayments at all even though tey fight for the priviledge of doing so.

3) The "All-In-One" Type of Mortgage

Caution: this mortgage type takes a lot of restraint and is not for everyone. Make sure you check with a mortgage professional before entering into this type of mortgage.

Instead of making weekly or biweekly payments or lump sum instalments of any size, you may consider switching to a relatively new type of mortgage sometimes referred to as an "all-in-one" mortgage.

Basically this turns your mortgage into an account where you deposit your pay or other income (this takes care of the minimum required payment) and then pay your bills, do your shopping etc from the very same account. The idea being that you earn more than you spend - that's why we urge caution - and by having every dollar you earn reduce your mortgage amount before you make your purchases , you reduce your mortgage faster. Think of it like a line of credit.

Some financial institutions offer this type of product however we can't stress enough that there are differences that must be considered and explained carefully before you get into this product even though the savings can be substantial.

No comments: