Are you interested in quickly paying off your mortgage? Paying your mortgage off faster is a fantastic way to save on interest, but it can feel burdensome putting more money into each payment. Instead, consider these very simple tricks for paying your mortgage off quickly without creating any financial issues for yourself.
Make Bi-Weekly Payments Instead of Once a Month
Most people make a mortgage payment once per month. For easy numbers let's say it's $2000. That would equal 12 payments over the year for a total of $24,000. Since there are 52 weeks in a year, if you divide that by two you end up with 26 payments over the course of a year. If you do each payment at $1000 (for the most part you would only pay twice a month, with a couple of months having an extra payment) you end up paying $26,000 over the year. And because mortgage interest is compounding, you are paying down more of your mortgage, more often so you'll also pay less interest.
All you need to do to set this up is to contact your mortgage company. While you could just send in a payment every two weeks, this would mean you would first need to send in an extra two week payment (since otherwise your second payment would be two weeks late). You then make exactly 50% of your mortgage payment every two weeks. But keep in mind, bi-weekly is different than bi-monthly!
Make An Extra Payment Every Year
If you don't want to make a payment every two weeks, you may want to consider instead just sending in an extra payment every year. This is best done when you have a significant portion of money coming in -- such as if you are getting an annual bonus from work. Making an extra payment every year will produce very much the same effect as paying every two weeks. Just make sure that when you make that extra payment it's going to your principle, not your interest!
Round Your Payments Up
Do you just want to pay your mortgage off a little faster? Even a small amount can help. Consider rounding your mortgage payments up to the nearest $100. If your mortgage payment is $1,215, rounding it up to $1,300 will make a significant difference over the years. And, in fact, if you pay your mortgage every two weeks and you also round your payments up, you can benefit from both strategies. Take a look at your budget to determine how much extra money you have after contributing to your retirement fund. Once you have an emergency fund and a retirement fund, you should consider putting additional money into your mortgage payments.
Refinance for a Shorter Term or Lower Interest
If you've had your mortgage for at least a few years, consider refinancing for either a shorter term, lower interest -- or both. This is an option if your credit score has significantly improved since you received your initial mortgage. Refinancing for a shorter term may be an option if your income picture has improved, as it will motivate you to pay your mortgage off faster. Refinancing with a lower interest rate can drastically reduce the amount of your payments -- you can then continue to pay the same amount you were, with all of the extra money going into principle.
Put 'Extra' Money Towards Your Mortgage
Grandma sent you a cheque for your birthday; she's so sweet! Consider putting that straight onto your mortgage. Gifts like these or bonuses from work are also called 'found' money, as it isn't money you were expecting or counting on. These gifts don't affect your monthly budget but they can make a difference on your mortgage.
Don't forget about your tax return! You can increase that amount by contributing more towards your RRSP program and when that time of year rolls around, take your refund and put it straight onto the principle of your mortgage.
Regardless of the strategy that you decide upon, it's important to start early. Because of compounding interest, the earlier your extra payments are, the more it will have an effect on how early you can pay off your mortgage in full. An extra payment within the first year of your mortgage will have a drastic difference, whereas an early payment in the 20th year of your mortgage may not make a significant change.Posted by Terry Paranych on