Wednesday, January 11, 2012

How I Paid Off My Mortgage........Payment Frequencies & Pre-Payment Options - Part 6

Payment Frequencies
Most banks will offer you several payment frequency options such as weekly, bi-weekly, semi-monthly and monthly.
· Weekly - 52 payments per/yr
· Bi-weekly - 26 payments per/yr
· Semi-monthly - 24 payments per/yr
· Monthly - 12 payments per/yr
When we had a mortgage we opted for the bi-weekly option, simply because I thought it would be easier to make my mortgage payment on the same day I got paid every two weeks. It also helped to keep me organized with my finances. Making bi-weekly payments means that you’ll make an additional two payments per year. This will cut down on the amount of interest that you will pay and shave down some years on your amortization.
Pre-Payment Options
I really took advantage of pre-payment options when I had a mortgage, in fact I looked for which banks at the time offered the highest pre-payment options. Pre-payment options are when a bank allows you to increase your payments and make additional payments on your mortgage through out the life of your mortgage. You may have seen or heard of 20+20 or 25/25. The first 20 or 25 means that you can increase your mortgage payment up to 20 or 25% per year. The second 20 or 25 means that you can make an additional mortgage payment up to 20 or 25% per year.  These numbers vary depending on the bank. There are also restrictions with pre-payment options with some banks, so please do your research beforehand.
Here’s how I took advantage of pre-payment options. The bank that I was with offered 20 + 20, so every time I would get a promotion or a raise that was high enough, I would increase my mortgage payment that year or the following year. I then made it a top priority to make additional mortgage payments every few months. Once I got rid of all my credit card, line of credit and loan debt, it freed up a lot of extra cash for me to make additional payments on my mortgage. Those payments that I use to make on my credit card and loan debt, I put towards making additional payments on my mortgage.  Any bonuses I would get at work, my income tax returns and cash gifts would all go towards my mortgage. I became really intense about getting rid of my mortgage. I cut all unnecessary spending to find that extra money.
When you make an additional payment on your mortgage, it’s a bit different from making a regular mortgage payment. A regular mortgage payment is split in several ways. A portion of your payment goes towards interest. This may be a huge portion if you’ve just started your mortgage and if your interest rate is high. The next portion goes towards your principal. If your bank is paying your property tax for you, then another portion of your payment will go towards your property taxes. To find out exactly how much of your payment is interest and principal, you can order an Amortization Schedule from your bank. Keep in mind that the higher your mortgage is, the more of your payment will go towards interest versus principal. This decreases over time as you pay down your principal balance.
An additional mortgage payment only gets applied to your principal balance and not interest. Making additional mortgage payments can reduce your mortgage significantly over time, causing you to pay it off much sooner.
Blend & Extend
This is another option I used to pay my mortgage off sooner. Not every bank offers blend and extend, so check out which banks do. I had my mortgage with BMO and they have this option. Blend and Extend allows you to blend your current rate and term with an existing rate and term. I did this when interest rates went down, so I could take advantage of the lower interest rate. The bank would blend my rate with their current rate, which would give me a lower rate than I was paying. When doing a blend and extend, your mortgage payment will often be reduced because your new interest rate will be lower. I recommend keeping your payment as is, so more of your payment will go towards your principal and less to interest, which will pay down your mortgage much faster.

1 comment:

Aloysa @My Broken Coin said...

I wish I could do a pre-payment option even partial one. Even one extra payment on principal. Unfortunately, we don't have any extra funds to spare. Maybe one day!