Pay Down Your Mortgage Faster
When you initially get your mortgage, your amortization will be set at a certain year, for example 25 years or 35 years. By making the required monthly payments, you’re set to repay the mortgage at the amortization you’ve taken. Initially, each mortgage payment is mostly interest and less principal. As time goes on, each payment will be less interest and more principal, so you’ll see that during the initial stages, very little of the principal gets paid off.
However, you’re not required to pay off your mortgage according to the initial amortization. So, if your initial amortization is 35 years and you wish to pay off the mortgage sooner, there are options available to you to do so. There are 4 ways in which your mortgage can be paid off sooner.
Option 1
The first way is to make “pre-payments” (also known as extra-payments or lump-sum payments towards the mortgage. Most lenders will give you allowance and this pre-payment allowance normally ranges between 10% to 25%. So, for example, if your mortgage balance is $300,000.00 and your annual pre-payment allowance is 15%, then you are entitled to make extra payments of up to $45,000.00 towards your mortgage on an annual basis.
Option 2
In addition to the pre-payment privilege mentioned above, most lenders will also allow you to make match-a-payments, also known as double-up payments. Using the match-a-payment feature, each payment you make can be matched by an equal amount. For example, if your monthly mortgage payment is $2000.00, then by using the match-a-payment feature, you can pay $2000.00 twice or $4000.00 every month. Every additional pre-payment or match-a-payment you make goes directly towards the principal balance of the mortgage, thus paying the down the mortgage quicker than planned. This results in a shortened amortization.
Option 3
The third way to pay off your mortgage faster is to increase your payment amount. Because any additional amount above and beyond your regular mortgage payment that’s applied towards the mortgage goes directly towards the principal balance, a higher mortgage payment would pay off the balance faster as well. Most lenders also allow a payment increase privilege where your mortgage payment can be increased by a certain percentage on an annual basis. For example, if your annual payment increase privilege is 15% and your initial monthly mortgage payment is $2000.00, this means that the following year, you have the option to increase the mortgage up to $2300.00 if you wish.
Option 4
Finally, one of the best ways to pay down your mortgage faster is to chose a greater payment frequency. Monthly payments will pay your mortgage back according to the initial amortization. Semi-monthly payments will pay down your mortgage slightly faster than monthly because you’re making the payments earlier. Bi-weekly pays down your mortgage significantly faster because of the 2 extra payments during the year that wouldn’t be made had you paid monthly. And, the fastest way to pay down your mortgage is weekly as it combines both the advantages of paying faster as well as extra