Paying off your mortgage sooner can be as simple as knowing the options available with your mortgage.
National Mortgage Web is committed to providing sound advice to clients so they can benefit from substantial savings. Payoff your mortgage sooner, just by using the following options will help you reduce your mortgage amount, interest paid and become mortgage-free faster.
How Would You Like To Payoff Your Mortgage Sooner?
- Increase the amount of your payments to decrease amortization.
- Renew your mortgage with today’s lowest rate, keep same monthly payments and reduce amortization.
- It’s important to switch to ACCELERATED payment for your mortgage.
- Lump – Sum Prepayment Options
Principal VS Interest
Each mortgage payment you make, the money is first applied to pay the interest of the mortgage. The remaining portion of payment is then applied to reduce the principal (the original mortgage amount you received from the lender).
In the first years of the mortgage, under regular payment schedule most of the payment goes toward the interest. As a result the principal amount of the mortgage decrease very little in the first years. However over the years, greater portion of the payment will go towards the principal.
During the lifetime of your mortgage, despite the interest rate charged on the principal amount, the total amount of all payments made can be double the original mortgage amount you borrowed. That’s why it is the safest and lucrative loans to the lenders.
In order to avoid being in the situation of paying nearly double for your mortgage, you need to create a simple plan to payoff the principal amount as fast as humanly possible. If you could increase mortgage payment that will allow you to reduce the amortization time to pay your mortgage in full, you could end up saving substantial amount of money in interest.
NOTE: The sooner you reduce the remaining balance of your mortgage the more savings you will have in interest charges.
Payoff Your Mortgage Sooner
1. Increase the amount of your payments to decrease amortization.
Traditional way to payoff your mortgage sooner is to increase the amount of your scheduled payment. Make sure to check with lending institution the rules of increase and decrease. Because if you increased the payment some lender won’t let you to decrease it back to the original payment, so do your due diligence and check your mortgage contract.
Example
- Chris has a mortgage of $400,000 that National Mortgage Web arranged for him with 25 years amortization and a Variable Rate of 2.40% for 5 years.
- Contractual mortgage monthly payments are $1,768
- Chris would like to increase his payment by $232 making it $2,000
- If the interest rate remains the same 2.40% over the lifetime of the 25 year mortgage, then here are the savings:
| Monthly Payments | $1,768 |
| Principal Amount | $400,000 |
| Interest Payments | $131,601 |
| Total Payments Made | $531,601 |
Increased Payments |
$2,000 |
| Principal Amount | $400,000 |
| Interest Payments | $110,253 |
| Total Payments Made | $510,253 |
| Interest Savings | $21,349 |
| Years to payoff | 21.2 |
Just by increasing the payments by an extra $232 a month over the life of the mortgage, Chris would save over $21,000 and finish paying the mortgage in 21 years, so its nearly 4 year sooner than scheduled.
2. Renew your mortgage with today’s lowest rate, keep same monthly payments and reduce amortization.
Once your mortgage comes up for renewal, or if you decided to refinance or renegotiate your mortgage to secure a lower interest rate. Even though your payment will be become lesser due to the lower interest rate mortgage, simply keep the amount of your installments identical and it will help to payoff your mortgage faster.
Example
- Michelle’s previous monthly payments was $1,886 on a $400,000 mortgage
- National Mortgage Web refinanced her mortgage from 2.99% to 2.40%
- New lower interest rate would have reduced the payment to $1,768
- She chose to keep the same old payment while renewed at lower rates
- New amortization is at 20 years, if same payment of $1,886 applies to new low rate, her amortization will shrink to 18.8 years.
Just by keeping the same payments of $1,886 monthly shrank the mortgage amortization to 18.8 years and Michelle will save over $6,000!
3. It’s important to switch to ACCELERATED payment for your mortgage.
By selecting accelerated weekly or accelerated biweekly payments can end up saving you tens of thousands of dollars in interest alone. Reason being is that you make one extra monthly payment per year.
Usually mortgage lender will offer standard and accelerated payment options. Standard payment options won’t make any difference in the total amount you will payover the term. Regardless if it’s weekly or monthly there are almost no savings in standard payment option. It is however different if you chose the option from monthly to accelerated biweekly or weekly, and can save a lot of money by switching to accelerated option.
- Monthly
- Semi-monthly
- Biweekly
- Weekly
- Accelerated biweekly
- Accelerated weekly
Example
Stephanie is about to sign the mortgage amount $250,000 amortized over 25 years with interest rate of 4%. Providing interest rate remains the same thought the mortgage life. Her mortgage broker provided payment frequency option and advises to take accelerated weekly. Here is the table National Mortgage Web offered to Stephanie:
| Payment Frequency | Amount | Annual Payments | Saved Interest | Repayment Term |
| Monthly | $1,315 | $15,781 | 0 | 25 Years |
| Semi-monthly | $657 | $15,768 | $113 | 25 Years |
| Biweekly | $606 | $15,767 | $115 | 25 Years |
| Accelerated biweekly | $658 | $17,096 | $20,455 | 21.11 Years |
| Weekly | $303 | $15,761 | $220 | 25 Years |
| Accelerated weekly | $329 | $17,096 | $20,685 | 21.11 Years |
Stephanie will save over $20,000 in interest over the life of her mortgage and will shorten it’s amortization by over 3 years.
4. Lump – Sum Prepayment Options
Lump sum is a prepayment that you could make in addition to your regular mortgage payments before the maturity of your mortgage term. The prepayment goes straight to the principal amount originally borrowed and the sooner prepayment is applied the less interest you will end up paying over the term and will become mortgage free faster!
Here’s what you need to know regarding prepayment options.
Here are important questions to ask your bank when shopping for a mortgage. It is beneficial for you to understand the prepayment privileges, conditions and penalties before you sign the mortgage contract.
- What’s the percentage I can prepay every year without a penalty?
- Is there certain date I can make prepayments?
- How penalties will be calculated if I break the term of my mortgage?
- How many sets of rates the bank is using to calculate the penalties?
Example
Alex has a mortgage of $250,000 amortized over 25 year that he would like to prepay $50,000 into the principal on the second year. Lender allows 20% prepayment every year, and Alex’s $50,000 works out exactly the allowed amount to prepay. Let’s assume the interest rate will remain the same 4% for the entire life of the mortgage 25 year.
| Over the mortgage period | No prepayment | Prepayment (beginning of second year) |
| Prepayment lump sum | – | $50,000 |
| Principal | $250,000 | $250,000 |
| Interest payments | $144,515 | $82,655 |
| Total amount paid | $394,515 | $328,734 |
| Interest savings | – | $61,860 |
| Years to pa off | 25 | 17.9 |
Making the prepayment lump sum will shrink the mortgage amount of interest Alex will have to payover the 25 year amortization by over $60,000, and he will be able to pa off the mortgage over seven years sooner.