5 Ways You Can Save Thousands of Dollars on Your Mortgage
By Quyn Lê Erichsen, M.Ed., RCC, CHt
Do you want to save thousands of dollars on your mortgage by just following a few simple tips? Here are 5 ways you could try out either for your current mortgage or your future mortgage:
1. Change your payment frequency from MONTHLY payment to ACCELERATED BI-WEEKLY payment. Why? Because you can pay off your mortgage a few years earlier and at the same time, save thousands of dollars.
How does it work? When you make MONTHLY mortgage payments, you pay 12 payments a year. Whereas when you make ACCELERATED BI-WEEKLY payments, you make 26 payments a year (52 weeks in a year, divided by 2, equals 26). This is equivalent to you making 13MONTHLY payments a year.
Here is an example of how you can save choosing the ACCELERATED BI-WEEKLY payment option:
Your mortgage is $300,000 with a 30-year amortization and a 2.99% fixed interest rate.
If you choose the MONTHLY option, your interest cost over 30 years is $153,674.86.
However if you choose the ACCELERATED BI-WEEKLY option, the cost of your interest will be $132,437.60, saving you $21,239.46. What’s more, if your mortgage has a 30-year amortization, it will take you only 26.4 years to pay off your mortgage. Likewise, if your mortgage has a 25-year amortization, it will take you 22.2 years to pay it off.
Of course, if your mortgage is higher, you will pay higher interest and vice versa.
You can check out yourself how much you can save on your mortgage by going to this mortgage calculator website:
http://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi
Many of us get paid on a bi-weekly basis. Hence choosing the ACCELERATED BI-WEEKLY payment option will not affect you in any significant way. All you have to do is call the financial institution where your mortgage is with. Tell them that you want to change your frequency payment to ACCELERATED BI-WEEKLY payment. Note the word ACCELERATED is crucial here. If you just tell them BI-WEEKLY, they will just average out your payments to 24 payments a year and not 26 payments a year, in which case it is the same as you making MONTHLY payments.
2. Interest rates can make a huge difference, even if the difference seems very small. In September 2014, we bought a house and our mortgage at the time was 2.99% interest rate. Six months later, we bought another house and the interest rate of our mortgage was 2.74%.
Using the last example of a mortgage of $300,000 with 30-year amortization and ACCELERATED BI-WEEKLY option, your interest cost will be as follows:
2.99% interest rate: $132,437.60
2.74% interest rate: $120,969.65
You save about $11,468. So don’t give up and shop around for the lowest interest rate possible when you get a mortgage or when it’s time for you to renew your mortgage.
3. Whenever possible, choose a shorter amortization period, as it can save you thousands of dollars. Again, using the previous example, the difference between 25-year amortization versus 30-year amortization can be as much as $22,955, based on the ACCELERATED BI-WEEKLY payment frequency. Of course, a shorter amortization period will result in higher mortgage payments, which may not be an affordable option for some people. However, the savings in interests can be quite significant so it’s worthwhile to consider. Imagine you purchased a house at age 30, and by the time you are 52, you don’t have any mortgage or rent to pay.
4. Take advantage of the privileges offered to you in your mortgage terms. Such privileges can help you pay off your mortgage as quickly as 10 years or more. For example, you might see something like 10% and 10% and double. This is what they all mean:
10% of the original amount of your mortgage (e.g. 10% of $300,000 equals $30,000). This means that you can make a lump sum payment of $30,000 each year if you so choose. However, this option might not be as feasible for many of us, as it is difficult to come up with this amount. Although we don’t have to pay this full amount, we can certainly pay some, perhaps with our yearly tax return?
10% of your mortgage payment. For example, 10% of your ACCELERATED BI-WEEKLY payment of $700 is only $70. So instead of paying $700 every two weeks, you can pay $770 every two weeks. Again, using the same example, you can save as much as $14,000 by paying 10% more on each of your mortgage payment.
Double your payment. This is another privilege where you can double each of your payment.
With TD Canada Trust for example, you can take advantage of all the privileges spelled out in your mortgage terms simultaneously. So taking advantage of one privilege does not disqualify you for using the other options within the same year.
5. Shop for the lowest interest rate when it’s time to renew your mortgage. Many of us automatically renew our mortgage with the same institution over and over again without bothering to shop around for the lowest interest rate. This is primarily done for the sake of convenience, as it can be very daunting and time-consuming to apply for a mortgage with another bank. Many people find it’s very helpful to get a mortgage broker to help them apply for mortgages. Such mortgage brokers can apply to different banks for you based on your information. Some mortgage brokers are also able to get preferred low interest rate from banks due to the high volume of their clientele. As discussed earlier about how small differences in interest rates can mean thousands of dollars in savings, particularly if you have a large mortgage, your work and persistence will pay off in the long run.
The bottom line: Be persistent and pay attention to the numbers, as they can mean tens of thousands of dollars in savings for you. When in doubt, ask questions. I didn’t know much about mortgages until last year, as it was my first mortgage ever. Remember 1 dollar you save on your mortgage means you, instead of the bank, are 1 dollar richer!
Good luck with your mortgage!