Over the years, we’ve learned a few tricks to help our clients become mortgage-free sooner. Here’s how to pay your mortgage faster with three bonus tips to help generate income to cover your payments and save for “lump sums.”
Understand Your Payment Frequency
Payment frequency refers to the period between your mortgage payments. The number of payments made each year impacts how quickly you pay down your mortgage and the total interest paid. Understanding how payment frequencies work can be confusing, as the names can be misleading. Here’s a quick explanation to help you understand how payment frequencies work:
- Monthly: This one is obvious, with one payment made each month, equaling 12 full payments each year. Semi-monthly: Semi-monthly payments are paid on the same date of the month, twice a month, typically the 1st and 15th, which equals 24 payments or 12 full payments each year.
- Biweekly: Biweekly payments are paid the same day of the week every 14 days, equaling 26 payments or 13 full payments each year.
- Weekly: Weekly payments are also obvious, paid typically every Friday of every week, equaling 52 payments each year, or 13 full payments each year.
In addition to your mortgage payments, there’s property taxes to think of. How do you pay property tax in Toronto? Read our blog to learn more.
Accelerated Mortgage Payments
So what are accelerated biweekly payments? Well, how mortgage payments are calculated makes an impact on how quickly you pay down your mortgage.
The accelerated mortgage compensates for the fact there are more than four weeks in most months, which makes a big difference over the life of your mortgage.
For example, for a regular biweekly mortgage, the lender takes the monthly payment x 12 divided by 26, which works out to 12 full months or 26 payments. For accelerated biweekly calculations, monthly payments are divided by 2, which works out to 13 full months or 26 half-payments.
Still have mortgage questions? Here are a few more posts you might find helpful:
- Getting Pre-Approved for a Mortgage
- Does a Pre-Approval Guarantee a Loan?
- How Much is a Down Payment on a House?
Increase Your Payment Frequency
Let’s take a closer look at how payment frequency calculations work over a 25-year amortization period:
- Monthly: 25-years
- Semi-monthly: 24-years, 11-months
- Biweekly: 24-years, 11-months
- Accelerated biweekly: 21-years, 5-months
- Weekly: 24-years, 10-months
- Accelerated weekly: 21-years, 5-months
The noticeable differences between accelerated and regular payment schedules pay off your mortgage 3.5 years sooner. Nice.
Paying Off Mortgage Early: Lump Sums
Open mortgages allow penalty-free lump-sum payments at any time but also have higher interest rates. The good news is that most closed mortgages offer prepayment privileges that allow you to make penalty-free limited lump-sum payments on top of your regular mortgage payments.
These options are based on a specific date in your mortgage or a specified time, like the end of your term. Lump sums in closed mortgages also tend to come with limited amounts, based on a percentage ranging from 10 to 20 percent.
The best thing about lump-sum payments is that they are applied to the principal when you don’t owe interest. Even an amount as small as $1,000 each year can save you tens of thousands in interest and chop off as much as four years from your amortization.
Often, the best time to make a lump sum mortgage payment is at the time of your mortgage renewal, as closed mortgages become open when you approach the end of your term. So understanding your limited amounts and timing as well as potential penalties is important when choosing your mortgage.
You can’t talk about paying down your mortgage without talking about equity. Read our blog to learn how to pull equity from your home and what can you do with it.
Is There a Penalty For Paying Off a Mortgage Early?
Prepayment and mortgage penalties apply to several early payment methods, including:
- Paying a higher percent than is allowed by your prepayment privileges
- Breaking your mortgage contract
- Early transfer to another lender before renewal or the end of your term
- One final lump sum that pays off your entire balance before the end of your mortgage term
- Paying your mortgage balance in full before your term ends after selling your home
Because prepayment penalties can cost you thousands of dollars, always speak to a mortgage expert to understand a) How the penalties are calculated, b) when penalties might apply, and c) if there is a better time to sell your home to avoid unexpected penalties based on your mortgage term.
Tips to Cover Mortgage Costs
Here are three ways you can use your home to earn additional income to a) help cover your mortgage costs and b) save up for higher lump sums:
- Use home equity to create an apartment to generate income.
- Live in the renovated apartment and rent out the larger space in your home so you can charge higher rent.
- Register on the Locations Library and rent out your home as a set for movies, commercials, television series, and web series.
Whether you’re moving up, downsizing, or entering the real estate market for the first time, The Christine Cowern Team is here to make the process easy. Get in touch with us today by calling 416.291.7372 or emailing hello@christinecowern.com.
