Here are 7 Great Tips for Paying Off Your Mortgage Faster
Financially smart investors typically look forward to the day their mortgage is paid off. It can free up their cash to build wealth in other ways. Achieving this goal early will save you thousands of dollars in interest. Here are 7 tips to help you pay off your mortgage faster.
- Lower your amortization. Choose the shortest amortization period you can comfortably carry. Forcing yourself to pay it off a few years earlier translates into lower interest costs and substantial savings—but your monthly payment will be much higher.
- Check for prepayment penalties. Mortgage lenders are in business to make money from you. When you pay off your mortgage early, the interest you’re saving is being lost by the lender. Prepayment penalties can be equal to a percentage of the mortgage amount, or a few months of payments. A 3% penalty on a $200,000 mortgage, for example, will ding you $6,000. If your contract is restricting your financial plans, be patient; when your mortgage comes up for renewal, you can renegotiate the terms.
- Save toward an annual top-up payment. Find a mortgage that allows you to make an annual top-up of 10% to 20% on the principal, without extra fees. Again, check the fine print on your mortgage contract, preferably before you sign it. And ensure this annual feature isn’t tied to the actual mort-gage anniversary, because you might miss the opportunity—as many have done.
- Use accelerated payments. This feature adds two extra payments per year, which reduces your debt that much faster.
- Pay attention to when the interest will be compounded. With some variable rate mortgages, the interest is compounded monthly. Other mortgages are compounded annually, or semi-annually. With annual compounding, you will pay the lowest interest. For example, a loan at 10% interest, com-pounded annually, can accrue less interest than one at 5% which is compounded every six months.
- Look farther than the big banks for the best rates. A mortgage broker has access to a different tier of lenders, offering much better interest rates. There is no cost to you because their commission is paid by the lender.
- Protect your cash flow. If you are aggressively working to pay off your debt, and you have no emergency fund, you could end up in a tight situation should you become unable to work for a few months. Save up the equivalent of 3 to 6 months’ worth of expenses before you focus on paying down your mortgage, to avoid costly fees.
We can connect you to a mortgage broker, and help you plan the best strategy to pay off your mortgage. Give us a call!