Brandon Nishi | Mortgage Broker
Pay Off Your Mortgage Faster
Switch your payment frequency
Switching from bi-weekly to accelerated bi-weekly payments can be one of the most painless ways to pay off your mortgage faster. With bi-weekly payments, you're making two full payments each month. Leading to a total of 24 payments per year. With accelerated bi-weekly payments, you're actually making 26 payments per year because you're making a payment every 2 weeks. With bi-weekly being the most popular frequency for workers to get paid, it's the easiest way for a homeowner to budget their income, and pay off their mortgage faster.
Example: Monthly vs. Bi-Weekly
At a glance, monthly and bi-weekly look relatively similar. Other than knowing the payment frequencies are different, the principle remaining balance is similar as well. However, since payment frequencies is occurring left often on a monthly payment, interest is accruing on the balance that can be paid off.
Monthly Payments: $1,892.98 x 60 (Months in a 5 year term) = $113,578.80
Bi-Weekly Payments: $873.10 x 120 (Payments twice a month by 5 year term) = $104,772
These two totals are how much you have paid over 5 years.
$113,578 (Monthly) - $104,772 (Bi-Weekly) = $8,806.80 is how much extra interest you have paid because monthly payments occur less frequently than bi-weekly payments
Example: Bi-Weekly vs. Accelerated Bi-Weekly
Bi Weekly payments: (2 payments per month) x (12 months per year) x (5 year term) = 120 payments over your term
Accelerated Bi-Weekly Payments: Payment is every 2 weeks. (52 Weeks per year) / (2) = 26
(26 Weeks) x (5 Year Term) = 130 payments over your term
You make 10 extra payments each year with accelerated bi-weekly payments.
Remember* With those extra payments, interest isn't accruing as fast on your principle balance
As shown below, you can pay an extra $10,281.63 your principle amount just by changing it to accelerated bi-weekly
Lump Sum Payments
Lump sum payments has numerous names such as extra principle repayments and balloon payments. The main highlight of lump sum payments is the amount of extra money you can put into your principal balance without have to pay interest on it. Many banks allow 15-20% of the principle amount to be paid back each year. No matter where you are in your repayment history, lump sum payments are usually a great option if you have extra savings.
Investment or Lump Sum Payments?
People often worry because they do not see an instant return when putting a money into their mortgage. However, lump sum payments are one of the easiest methods of return when you have extra cash.
Savings Account: Banks offer 1-2% interest savings. With $10,000. you earn $300
Lump Sum Payment: Usually the interest rate is 1-2% higher than the normal savings rates. With $10,000, you would save $300. Over the course of the 25 year amortization, you would save $10,189.98 and reduce the amortization period from 25 years, to 24 years and 1 month.
Shorten Your Amortization Period
Shortening your amortization period sounds obvious, but not many people necessarily want to change it for many various reasons.
Savings: By lowering your amortization period, you will undoubtably pay off your mortgage faster and will pay less interest. Less time means less time for the interest to add up on your principle amount.
Things to consider before you shorten your amortization period
- Higher monthly payments: Although you pay less interest with a lower amortization period, your payments will be marginally higher
- Lump sum payments. Rather than being obligated to pay higher monthly payments every month. You can save the difference and pay in lump sum payments. Therefore, at short periods of time, you'll have some savings reserved in case of an emergency
- Since there are higher payments associated with shorter amortization periods, you'll qualify for a much lower mortgage.