At the start of your mortgage, your balance can seem like a huge number to tackle. But if you make use of your pre-payment options you can have a big impact on how long you have a mortgage.  Pre-payments go straight to your principal so those extra payments immediately reduce how much interest you will pay and how long you will have the mortgage. Let’s look at an example of how these work:

Example

Initial Mortgage

You purchase a $400,000 home with a 5% down payment. At 3.34% amortized over 25 years, your monthly payment is $1,940. 

Total interest paid: $186,766*

Mortgage freedom: 25 years

Making Pre-payments

You decide to make use of your pre-payment options and increase your monthly payment by $200 and make an annual lump sum pre-payment of $2000 each year:

Total interest paid: $140,176 for an interest savings of $46,590*

Mortgage freedom: 19 years 7 months

You decide you can even be more aggressive and increase your monthly payment by $300 and make an annual lump sum pre-payment of $3000 each year:

Total interest paid: $124,684 for an interest savings of $62,082*

Mortgage freedom: 17 years 9 months

TIPS

• Small amounts more frequently save you more interest than the same amount paid in one lump sum each year.

• Lenders differ on the pre-payments they allow – how much and how frequently (ex. Once per year vs. any payment date).  Make sure you get the right mortgage and lender that will give you the pre-payment features you need to be mortgage free faster.

• You can set these up to happen automatically, which will help you keep on track with your mortgage freedom goals.

• Mortgage payment frequency has very little impact on the interest you pay.  Bi-weekly payments are often accelerated which means they actually increase the payment to build in two extra payments a year.  Pick the frequency that works best for you and then increase it.  Payments do not need to be bi-weekly or weekly, it just needs to be increased.

• If you get an increase in income, immediately increase your payment.  You will not feel the impact on your lifestyle.

• Tax refunds are a great opportunity to do a lump sum payment.

• Paying off your mortgage can give you financial freedom, but there is no sense focusing on this while you pay other debts at a much higher interest rate. Focus on high interest debt first, then you can tackle your mortgage.

I’m a big believer in setting goals and then implementing the steps needed to get there. It you have a mortgage and have a goal for mortgage freedom, give me a call and I’m happy to help you get there.  And yes, I expect an invitation to the mortgage burning party!

*Assumes interest rate stays at 3.34%. If rates increase over time, interest costs and interest savings are even greater.