REDUCE YOUR MORTGAGE COSTS TERM & SAVE

In the current climate of low interest rates, opting to purchase a home is a smart move. Yet, financing a substantial investment like a home often entails a blend of personal savings and borrowed funds through a financial arrangement known as a mortgage.

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Mortgages involve repaying the borrowed principal along with interest through regular installments, with the option to include property taxes. Typically, mortgages span a 25-year amortization period, signifying the time required to fully clear the debt.

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For most homebuyers, mortgage repayment stretches over the long term. Therefore, it's crucial to explore options prior to purchasing or renegotiating an existing mortgage. Your REALTOR® can aid in determining an affordable mortgage amount and offer insights into the various available choices. However, even if you're locked into a lengthy mortgage term, there are avenues to expedite payoff and attain mortgage-free status sooner.

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Prepayment Alternatives

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Numerous financial institutions present attractive prepayment options. While frequency might be restricted, delving into these choices and comparing offerings between lenders is prudent. Many lenders allow annual lump-sum payments that directly reduce the principal. For instance, a $2,000 annual lump sum on an $80,000 mortgage can substantially trim down the term.

Other privileges include doubling payments when you have surplus funds. Some lenders enable additional payments equivalent to a full monthly payment on each due date or multiple times throughout the year. Accelerated bi-weekly payments can also generate significant savings over the mortgage's duration.

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While capitalizing on prepayment privileges minimizes interest costs, it's essential to consider all aspects. Although the principal decreases, existing payment obligations persist.

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Critics of prepayment suggest that if your interest rate is reasonably low, allocating extra funds might have more advantageous alternatives. A $2,000 prepayment reduces the principal but lacks tax benefits. Investing the same sum in a registered retirement plan offers a tax break. If invested in a 10 percent yielding mutual fund while your mortgage rate is seven percent, you generate a three percent higher return on investment.

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Shorten Amortization Period

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The typical 25-year mortgage can be curtailed by opting for a shorter amortization period. This strategy reduces the mortgage term, leads to larger payments, and results in substantial interest and overall savings. Selecting a shorter amortization is particularly strategic when interest rates are low, and higher monthly payments are manageable.

Mortgage Refinancing

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Refinancing is beneficial if you possess a fixed, long-term mortgage and rates have dropped by over two percent. However, the expense of refinancing, to secure a better rate, can be significant. Discharging a closed mortgage generally incurs either a three-month interest penalty or an "interest differential", which can be notably high.

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Mitigating the penalty, calculated based on outstanding principal, involves exercising a prepayment privilege to decrease the principal. This can be accomplished using personal funds or arranging with another lender to borrow enough for mortgage discharge and penalty payment. Seeking professional advice before refinancing is crucial to avoid overspending compared to staying the course.