If you got a new mortgage before 2008, you may have a mortgage that has an extended amortization of 35 or 40 years. In 2008, many first-time home buyers where keen to choose longer amortizations to keep monthly mortgage payments low. Although longer amortizations can keep mortgage payments affordable, it also means that it takes longer to pay down the principal on the mortgage.
I normally recommend going with as short of an amortization as your budget can afford. There is considerable interest cost savings on shorter amortizations.
Here are a few tips to help you pay down your mortgage faster…
Know the difference between bi-weekly and bi-weekly accelerated payments
There is a difference between bi-weekly and bi-weekly accelerated payments. The difference lies in how the payments are calculated, which make them accelerated. Here is an example of a $200,000 at 4% based on a 25 year amortization. Look at the savings!
Principal Interest Total payment Real amortization Balance 5 years
Bi-weekly $180.24 $304.89 $485.13 25 years $174,107.21
Bi-weekly $221.1 $304.89 $526.03 21 years, 11 mnths $168,231.61
Accelerated
I’ve have clients bring their mortgage statements to my office looking for mortgage advice and had no idea that they were not paying accelerated payments, which was their originally request.
Set lifestyle priorities that include making extra payments on your mortgage
I did a mortgage earlier this year for a client who became angry that the option of a bi-weekly payment was not available to her, instead of only a bi-weekly accelerated payment. The difference in payment between the two options was about $40 per payment higher on the accelerated option. The bi-weekly accelerated payments on a 30 year amortization also allowed her to shave three years off of her mortgage. When I asked why the accelerated option was problematic, she stated that she had a certain material lifestyle she wanted to lead and that extra money would help with that lifestyle.
In times of economic and financial instability, setting priorities that include debt pay down, such as mortgage principal pay down is crucial. Your home is virtually the most valuable financial asset you have. By paying down your mortgage it will place you in a better financial position, now and in the future.
