Your options when it comes to paying your mortgage.
When it comes to paying for your mortgage, you will be given a variety of choices that will affect the length of time it takes to pay off the mortgage in total, how much you pay each month and how much in interest you will have paid by the time you repay the loan. When you are negotiating your mortgage, ask your mortgage professional or lender to explain all of these options to you.
Blended mortgage paymentsThe first thing you should know is that most mortgages these days are based on blended payments. A blended payment is one in which each payment you make includes an amount applied to the interest (the interest you are paying each month for the loan), and an amount applied toward the principal (the amount you borrowed).
How much of each payment is interest and how much is principal will depend on how far you are into repaying the mortgage. The earlier in your term you are, the more you pay in interest and the less in principal. For example, if your payment is $500 a month, your first payment might be applied as $400 towards interest and $100 against the principal. In month 48 of a five year mortgage your $500 payment might be applied $250 towards interest and $250 against the principal. Nevertheless, your total payments remain the same.
The mortgage statement you receive at the end of each year will show exactly how much was applied from each payment to interest and principal.
Taxes and mortgagesEvery home owner pays property taxes to their municipality. Or should. If you don’t make those payments the municipality can place a lien on your property. This puts your mortgage lender in second place to be repaid should you run into money troubles and have to file for bankruptcy.
Many lenders therefore require home owners to make their property tax payments through them in monthly installments. It is one less thing for you to remember, but there are costs associated. Make sure you stay up to date with your current year’s municipal assessment and tax rate, and keep track of what the lender is taking from you. If they’ll let you, and you can budget carefully, you might want to make your property tax payments directly to the municipality.
Amortization is the length of time it will take you to pay off your mortgage. Most mortgages have a 25-year amortization period, but you can choose fewer years than that. While a longer amortization will result in smaller monthly payments, it will also mean higher interest costs. Find out what happens to the numbers if you were to select a 20-year amortization period, but be careful to ensure that this won’t make you “house poor” - spending a large proportion of your total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. Most mortgage lender website have calculator tools to help you.
You can usually choose to repay your mortgage every month, twice a month, every two weeks or even every week. What you decide may depend on how often you get paid, and how long you want to take to pay the mortgage in full. A simple thing like making mortgage payments every two weeks instead of twice a month can bring your amortization period down to 21 years compared to 25 for example and cut the interest you pay.
TermThe mortgage term is the length of time your agreement and interest rate is in effect with the lender. Although your amortization period to fully pay off the loan is 25 years, you could have a term length of one, three or five years. At the end of the term, you can renew or renegotiate your contract, including the interest rate and payment schedule. You also have the choice of staying with your current lender or shopping around to find a better deal. This ensures you aren’t locked in to the same agreements over the entire length of your mortgage.
Some mortgage providers will allow you to pay more with each payment than you’d pay regularly and if, for example, you receive a raise at work, or finish paying off your student loan, this might be a good option. If your regular payment is $800, ask your lender if you can increase your payments to $900. It will enable you to pay down your mortgage more quickly and will also reduce your total interest costs over the term of the mortgage. Should something unforeseen come up, most lenders will allow you to reduce payments back down to the previous level if you need to.
Other options to pay your mortgage off sooner and save on interest
Keep monthly payments the same if mortgage rates have fallen
Say you’ve been paying $1,200 a month for your mortgage at an interest rate of five per cent for five years. Now, when you go to renew, rates have fallen and your lender offers you a new five year term at three per cent. You have two options. Make the new lower payments of $900 a month for five years, or keep you monthly payments at $1,200. Keeping the payments at $1,200 will allow you to pay off your mortgage sooner and you’ll save a lot of money in interest.
Make a lump-sum payment
Most closed mortgages (but not all) allow home buyers to pay off a percentage of the original principal in each calendar year without penalty. This might be a great option for you if, for example, you get a tax refund, or receive an inheritance.