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You Can Cut Years Off Your Mortgage And Save Thousands Of Dollars

Most homebuyers choose a mortgage with repayment terms that suit their current lifestyle and budget. But what if you find yourself with extra cash on hand down the road? By using that cash wisely and paying down your mortgage faster, you can save thousands of dollars in interest and cut years off the life of your mortgage. Even if you've locked into a long-term mortgage with an affordable interest rate, you may still have the flexibility to pay down your mortgage faster than scheduled. Many financial institutions now offer generous prepayment options, but some limit the frequency with which you may apply them. To be able to use your extra cash to reduce the interest costs on your mortgage, choose a mortgage lender that offers the types of prepayment options described below.

The following examples illustrate exactly how affordable these different prepayment options can be. Each example is calculated based on an $80,000 mortgage at a constant interest rate of seven per cent amortized over 25 years for a monthly payment of $560.00, here are four budget-friendly ways to put extra cash to work.

ACCELERATED NON-MONTHLY PAYMENTS:
When applying for a new mortgage or renewing an existing one review your budget and your regular cash flow patterns and look for a "fit". If you're paid every two weeks, for instance, consider matching your mortgage payments to your paydays and by choosing a biweekly payment schedule. More frequent payments matched to the timing of your income can result in substantial savings over the life of your mortgage.

If you're comfortable adding a little more to each payment, you might think about accelerating your mortgage payments. Assuming you have already selected a biweekly payment schedule, an accelerated biweekly payment would amount to your original monthly payment of $560.00, divided in half ($280), and paid every two weeks. By following this formula, you'll actually end up making 26 payments per year, or the equivalent of 13 monthly payments. And like many people, you'll barely notice the difference.

In the example outlined above, you'd be paying only about $47 more each month than you would in the regular monthly payments. But here's the big difference your 25-year mortgage would be paid off in just 20.5 years and you'd save almost $19,000 in interest costs over the life of your $80,000 mortgage.

ANNUAL PAYMENT INCREASE:
If your mortgage proves easier to handle than expected and you feel you can afford slightly higher payments, you could consider an annual payment increase, an option offered by many lenders today. This option allows you to boost your regular mortgage payments once each year throughout the term of your mortgage and to apply that increase directly to reduce your principal.
Let's say you earn a three per cent salary increase for four subsequent years. By increasing your monthly payment amount by three per cent once each year for four years an increase of approximately $17-$20 per month every year you can cut 5 years off mortgage and save more than $19,000 in interest costs.

DOUBLE-UP PAYMENTS:
You may find that you sometimes have extra cash, but don't want to commit to higher mortgage payments on a regular basis. Some lenders allow you to make additional payments against your mortgage balance (up to the equivalent of a full monthly payment), occasionally or even every payment date. The extra payment is applied directly to your mortgage principal to reduce the balance. If you were able to make the equivalent of just two additional monthly payments each year, your 25-year mortgage would be paid in less than 18 years and you'd cut your total interest costs from approximately $ 88,000 to just $59,000 for a savings of almost $29,000!

LUMP SUM PAYMENTS:
A bonus or your annual tax refund is tailor-made for a one-time lump sum payment on your mortgage. Most lenders permit this type of prepayment and, once again, the additional capital goes directly towards reducing your principal. An annual lump sum prepayment of $2,000 made each year until your mortgage is paid off will save you almost $40,000 in interest on your $80,000 mortgage and you'll be mortgage-free 10 years earlier than expected!

So remember look for a lender that gives you a selection of prepayment options for maximum flexibility. By using these options wisely, you can save on interest costs over the life of your mortgage regardless of your personal cash flow patterns.

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