A mortgage is a huge financial commitment, and as you’re probably well aware, a significant portion of your payments go towards interest. Regardless of what mortgage you've decided is right for you, it's smart to think ahead and figure out how to make more of your monthly payments go towards your principle. You'll quickly realize that the quicker you can pay off your mortgage, the less you’ll pay in total.
In order to pay off your mortgage faster, you will need to pay above and beyond the minimum payment amounts that your lender requires of you. This can be easier said than done! It comes down to the concept of delayed gratification, in which you put aside whatever would be most gratifying to you immediately, and choose the option that is better for you in the long term.
Here are a few different methods that can help you get in the habit of delaying gratification and putting more money down on your mortgage.
1. Rounding Up
If your mortgage is set up for automatic payments, you may need to look into how this will work, but for this method, you basically round your mortgage payment up to pay a little extra each time. So if you regularly pay $581, twice a month, you would pay $600 each time instead. Or you could add a set amount, such as $50, to each payment.
Regardless of what works best for you, the key is that if you're paying just a small amount extra each time, it won’t be a huge sacrifice which requires you to change your lifestyle. That little bit extra, each time you round up, adds up and can make a substantial difference over time.
2. Bi-Weekly Payments
When you opt to make your mortgage payments bi-weekly, you're making a payment every two weeks, regardless of how many weeks there are in a month. That means that there will be a couple of months every year in which you will actually make three payments instead of two. That seemingly small amount can actually result in you paying your mortgage off as much as five years sooner! Imagine all the money you will save on interest.
3. Bonus Bucks
Chances are you will find yourself getting some extra money at some time throughout the year. This could be a cheque at Christmas or for your birthday, a bonus from your employer, or even money you get back on your tax return. Rather than thinking about how you would like to spend it, consider making the wise decision of putting it straight towards on your mortgage. Of course, it would also be okay to keep a portion to treat yourself and put at least some of it towards your payments.
Another method that could help you to pay your mortgage off sooner is to look into the option of refinancing. After a certain number of years, you should have the option of refinancing your mortgage. You could refinance it with a lower rate, but continue to make the same payments you were making before. Or it may be possible to renegotiate the term. For example, if you have 20 years left on your mortgage but renegotiate it to a 15-year term, then that would save you 5 years of mortgage payments and added interest.
Why Is This So Effective?
With each mortgage payment you make, part of it goes toward the principal balance (the actual amount of money you borrowed) while another portion goes to the lender in the form of interest. The percentage of interest depends on what you owe on your loan, or the principal balance.
At the beginning of your loan term, a much higher percentage of the payment goes towards the interest. With time, more of your payment will go towards the principal. When you make an extra payment it actually goes straight toward the principal balance, so each subsequent mortgage payment will have a slightly smaller interest percentage.
When you add a little bit extra to your regular payments or use something like bonus money to put towards your mortgage, it doesn’t have a big impact on your day-to-day living. It's a fairly easy way to make a huge difference on your finances in the long term without really affecting your current financial status.
If you have other outstanding debts, it makes sense to assess your situation first and decide where to direct any extra money. Your credit score matters, and something such as credit card debt usually comes with a very high interest rate. It may make the most sense to pay off your credit card debt as quickly as possible, and then you will have even more funds freed up to begin paying extra towards your mortgage.
Making small changes now to help you pay off your mortgage sooner doesn't need to add a lot of strain to your life. If you keep the end goal in mind and make small sacrifices, you will set yourself up to be in great shape financially and shave years off your mortgage payments.