 Prudential Lifestyles Real Estate, Brokerage |
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 Mortgage Savings Pay a little more now, save a lot later. It works better than you might think - if you do it right. How often have you seen the line "carries cheaper than rent" in real estate ads? It's true, in these days of lower interest, mortgage payments can be cheaper than rent payments, especially in Orillia. But there's a big difference between the two - while rent goes on forever, a mortgage can be paid off. You need to focus on that fact in order to develop a good mortgage strategy, one that will give you huge savings over the long run, no matter what happens to interest rates or house prices. In a nutshell, the strategy is: Don't pay less - pay more. It is important to consider this if you are shopping for a new mortgage, but there are probably clauses in your existing mortgage that, if used properly, will give you returns in the range of 300 - 400%, or even more, during the life of the mortgage. The main idea is to put more money towards the principal and waste less on interest so you can pay off the mortgage sooner. There are several ways to do this: An "open mortgage" allows you to make unlimited lump sum payments. This is good if you think you are coming into a lot of money soon, but you also pay a higher interest rate so it may not be worth it to you. Better to use clauses that can be included for free. "Double-up" your payments once a year. Most lenders allow this, many allow you to do it every month. What difference could one payment make? If you have say, a $100,000 mortgage at 7.5% amortized over 25 years, your monthly payment would be about $731.55. If, at the end of the first year, you doubled-up, you'd reduce your principal by that amount, something which, right then, would take you almost five payments to do. So by making one payment you've just saved yourself approximately 4½ payments of $731.55 each or about $3,290. Make biweekly payments instead of monthly payments. There's a trick to watch out for here. In calculating biweekly payments, some banks will take your yearly payment and divide it by 26, but that won't help you. You must pay every two weeks at least half of what you would normally pay every month, that way you are making the equivalent of one extra payment a year with more money going towards the principal. So for example on that same $100,000 mortgage, after five years paying monthly you would still owe $91,604.82, but paying biweekly you would only owe $87,100.87. At that rate, you would pay off that 25 year mortgage in about 20 years. So by making 20 extra payments (one a year), you've saved five years of payments, a difference of almost $30,000. There are several other clauses you can negotiate into your mortgage that will help you towards your goal of being "home free". They are: Portability This allows you to transfer the mortgage to a new property if you decide to move. That way you save the payout penalties (which in Ontario are sinful) and you can keep the momentum going on the savings you got from using the other clauses. This is especially important with today's low interest rates. Quicker Amortization The amortization is the number of years it will take you to pay off the loan. Higher numbers mean lower payments but more of them. 25 years is the norm in Canada but, if you can afford it, ask for a 20 or even 15 year rate. That means you stop making mortgage payments 5 or 10 years sooner and pay much less in interest over the course of the loan. Go to our Mortgage Calculator to see approximately how much interest you can save, you'll be amazed. If you are looking for a home now, here's a sure-fire strategy to save you lots of money. You should always go to a lender to be pre-approved for a loan before you even look, so do that (remember - pre-approved, in writing, not just pre-qualified). The lender will tell you what price you can afford to pay for a home, based on a 25 year amortization. Then, if you can, buy a home that's cheaper. When you finalize the loan, instead of lower payments, make the same payments as for the higher priced home. That will lower your amortization period and the mortgage will be paid off sooner. While you may be tempted to invest your extra money in RRSPs or savings bonds, paying down your mortgage is the best investment you can make. Virtually nothing else pays you as much as you can save this way. For more detailed information on your specific situation, contact any one of our Sales Representatives, or email our office. You can also call us toll-free from anywhere in Ontario at 1-877-301-HOME (4663) or locally at (705) 327-2222. We are not mortgage brokers, but all our Sales Representatives receive training in mortgage financing and can help you achieve your goal of being home free!
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© 1998-2004, An independently owned and operated broker member of Prudential Real Estate Affiliates, Inc. A Prudential Financial company, owner of the trademarks. Used under license. Prudential Financial, Inc. of the United States is not affiliated with Prudential plc which is headquartered in the United Kingdom. |
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