Think long term and try to pay off your mortgage early
Being a homeowner has many benefits, but being wed to debt isn’t one of them. Paying the minimum balance on your mortgage will keep you in debt for the majority of your life, as traditional mortgages are 25-year or 30-year commitments. Start thinking seriously about your financial future by finding ways to pay off your mortgage early. It may be the best decision you ever make. Let’s take a look at the benefits—and strategies—of paying off your mortgage early.
The most obvious benefit of paying off your mortgage early is that you’ll save money. That’s because when you make a payment, it is first used to pay off the interest you owe, rather than the principle you borrowed. To put it simply, if you only make minimum payments, you’ll end up spending a lot more than you borrowed. The Financial Consumer Agency of Canada estimates that on a typical 25-year mortgage, you’ll end up spending about double the amount you originally borrowed.
Paying off your mortgage early is also a smart path to financial freedom and peace of mind. After all, your mortgage is probably your biggest monthly expense, so eliminating that debt will free up your income to make other investments or purchases. Furthermore, you won’t have to worry about losing your assets in the event of unemployment, and you’ll enjoy financial security well into your retirement years.
Now, the hard part begins. Paying off your mortgage early requires financial discipline, i.e. making more payments more often. Here are some strategies that will help you with the process:
- Make a prepayment. Prepayments are lump sum payments that help reduce the cost of your principle. Your mortgage agreement will specify the amount you can prepay, and how often you can make prepayments (usually once per year). Taking advantage of this option will help you cut down on the amount you pay in interest over the life of your loan.
- Make bigger payments. Most mortgage agreements allow you to increase your payments by at least 10 percent. Paying even an extra $100 each month will save you thousands of dollars and shorten the amortization.
- Make more frequent payments. Increasing the frequency of your payments from monthly to bi-weekly, weekly, or accelerated bi-weekly or weekly will help you fit in an extra payment each year, thereby shortening the lifespan and the amortization interest cost.
- Refinance for better rates. Do some comparison shopping to find the best mortgage rates and consider switching at the end of your current term. Even though you’ll be entitled to make smaller payments, pay the same amount you did before. You’ll generate savings by paying down the principle faster.
- Refinance with a shorter-term mortgage. This is a good option if you’re only a few years into your mortgage payments. Reducing the amortization period will automatically result in higher monthly payments, which, in turn, will drastically reduce the amount of time you are in debt and interest you have to pay.