Save Money on Your Mortgage
I worked for almost 10 years as a secretary to lawyers who practiced in several areas, but the majority of work we did was in real estate. I learned a lot about how mortgages work and how to save a lot of money on your mortgage. I really think that anyone who owns a house should make an effort to understand how a mortgage works. Your home is, after all, usually the largest purchase you will ever make and the payments will be with you for a very long time. Now, I know that a lot of things are different between the U.S. and Canada in this area so please bear in mind that I live and work in Canada. And of course, any suggestions I am giving are based only on my personal experiences - I do not have any kind of formal financial training. I would suggest that you get more information from your banker, lawyer or financial advisor before taking any action.
- Find out if your mortgage company gives you the option of paying more frequently than monthly. Most banks now have provisions for making weekly payments. There are a couple of ways that this saves you money. First of all, the way the weekly payment is calculated by the bank (usually) is to take the monthly payment and divide it by 4. But since the year is not 48 weeks (12 months x 4) but is 52 weeks, you pay 4 weeks, or one monthly payment, extra every year. However, not all banks do this, some take the monthly payment, multiply by 12 then divide by 52, which means that you pay the same amount over the course of a year. BUT it is still to your advantage to pay weekly. Each time you make a payment, the amount you are paying toward principal is applied when you make the payment, and the remaining principal reduces accordingly. So...on your next payment, the interest amount is a shade lower, and the principal payment is a shade higher. It starts out as a fraction of a cent, but in the long run makes a huge difference! The basic rule of thumb I used to use was that a mortgage amortized over 25 years would be paid in 17 years by paying weekly. And considering that by the time you have made all the payments on a 25-year mortgage, you have generally (depending on the interest rate) repaid at least 3 times the original amount borrowed. So paying it off sooner saves you thousands of dollars!
- If you get paid weekly, making weekly mortgage payments is much easier to budget, too. But don't despair if you get paid biweekly or semi-monthly - mortgage companies have become very flexible in the last few years, and quite probably you can make your payments to correspond with your paycheque. You won't save as much as you would by paying weekly, but it is still worth it.
- Look for a shareware or freeware program that calculates amortization schedules. By entering in different variables (higher/lower interest rates, higher/lower payment amounts, weekly vs monthly payments, longer and shorter amortization periods), you will see for yourself what a difference these variables make. The wisest course is to choose the shortest amortization period you can afford, make weekly payments, and get the lowest interest rate possible. If you can't afford to amortize over 15 years, maybe you can go for 20 instead of 25. Mortgage companies seem to automatically assume that everyone wants a 25 year mortgage...and with good reason, they want your money! :-)
- A fully open (repayable without penalty) mortgage is more costly in terms of interest - usually they are a percentage point or two higher. Unless you know you are going to be able to pay it off in full within the term, don't bother. But most mortgages include an allowed annual prepayment amount, and if yours doesn't, make sure it does when you renew the terms! Try to get the minimum prepayment as low as possible, that way if you find a $50 bill on the sidewalk, you can put it towards the principal without the bank saying, "sorry, you cannot make a prepayment of less than $100".
- Find out if you can increase your regular payment amount without penalty - even if all you do is round it up to the next dollar, or the next 10 dollars, every little bit helps! If you're like me, you round it off anyway for budgeting purposes, so this is an increase you probably wouldn't even notice. Don't be surprised if your bank won't let you do this...they may require a set, higher amount. But it doesn't hurt to ask! A friend of ours was told by his bank that he could not increase his weekly payment by $2 (they actually laughed at him), so instead he bought a $100 Canada Savings Bond through paycheque deduction ($2 a week!), then when it was paid for and cashable, he put it and the interest it had earned as part of his allowed annual prepayment. Normally this would not be the smartest way to make a prepayment, since the interest rate on his mortgage was higher than the interest he earned on the CSB, but it was painless for him, and he was able to make a prepayment when he otherwise would not have.
- If you do come into a windfall of some sort, push down those desires to just spend it on fun stuff! Make your allowed prepayment with it and pat yourself on the back for taking a nibble out of your biggest debt. All those nibbles add up to a bite, and the results will be worth it.
- When your term is up and it is time for renewal, shop around! If you have a decent credit rating, quite often the banks will fall all over themselves to get your business. You may be offered a lower interest rate, or some kind of incentive to switch to their mortgage company. Then, with this information in your hand, go back to your existing mortgage company and see what they will offer to keep you. You will be in a much better position to negotiate if you are aware of your options.
There are, I'm sure, lots of other ways to reduce your mortgage debt. I hope you found some ideas that will help you here and if not, there are lots of resources available on the net. If you need incentive, plan your mortgage burning party and imagine what you would do with that extra money every month once it's paid off!