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Mortgage Pre-Payment Privileges
January 11, 2012 by mortgagegirls · Leave a Comment
Do you know your Mortgage Pre-Payment Privileges?
There are basically 3 ways to pay your mortgage off faster. Increase your payments, increase the frequency of your payments, or pay a lump sum. The advantage of pre-payment privileges is any additional funds you pay above your minimum mortgage payment will go directly towards your mortgage principal. By lowering your principal, you will save on interest and your balance at the end of your term will be lower.
We suggest you contact your existing lender or review your original mortgage commitment to find out what pre-payment privileges your current mortgage term will allow without any payout penalties. The norm in the mortgage market today is 15-20% payment increase yearly and up to 15-20% lump sum yearly (which most often can be paid throughout the year). Some lenders also offer a double-up payment & skip a payment option, or a higher % of pre-payment yearly.
Here are some examples of how you can save money by utilizing your mortgage pre-payment privileges;
Example: Karyn has a mortgage of $250,000 with a fixed interest rate of 5%. She has 3 years remaining on her 5-year term and 33 years left in her amortization. She currently has monthly mortgage payments.
INCREASING MORTGAGE PAYMENT FREQUENCY.
By going from monthly to accelerated bi-weekly payments, Karyn will;
- reduce her mortgage balance by over $4000
- reduce her overall amortization by over 5 years
- only pay an extra $107 a month
INCREASE MORTGAGE PAYMENT AMOUNT
By increasing her mortgage payment by 10% for the remaining 3 years of her term, she will;
- reduce her mortgage balance by almost $5000
- reduce her overall amortization by over 6.5 years
-only pay an extra $129 a month
LUMP SUM PAYMENT ONCE YEARLY
Let’s say Karyn got a bonus at work, so she paid off her personal debts and paid a lump sum of $1000 towards her mortgage principal only once during her remaining 3 year term, she will;
- reduce her overall amortization by 4 months
- save $3828 in interest
Or, what if Karyn could pre-pay $2000 over her 3-year term, she will;
- reduce her overall amortization by 7 months
- save $7583 in interest
As you can see, you can save money and time by utilizing your pre-payment privileges. Keep this in mind if you are considering getting a new mortgage as there are “no-frills” products out there that have greatly reduced pre-payment privileges in exchange for a lower rate. Or, if you are looking to reduce your personal debt load, you can look at refinancing your mortgage to pay off debt and then utilize your pre-payment privileges to pay down your mortgage faster thereby getting you debt free sooner!
Contact us today if you have any questions about mortgages. Martene Woodward or Jackie Woodward at 866-932-8412 or info@mortgagegirl.ca
