Over the years, I have met some really great mortgage professionals. The best of them know their business inside out, and see their job as really helping home buyers/owners – not just to get a mortgage, but to manage that mortgage intelligently, and pay it off as quickly as possible.
Morgan Vaughan is one of the best. He works out of the RE/MAX Hallmark Pape Ave office, and routinely offers great advice to us Realtors, helping us help our clients with everything from first-time mortgages to complicated re-financing. It’s amazing how much money can be saved by asking the right questions and making the right moves. The other day he shared some great tips about how simple, cost-effective strategies can create big savings over the life of a mortgage. I asked Morgan if he would grace the pages of my blog with a guest post, and he has generously agreed. 😉
Okay, I Have My Mortgage. Now What?
With house prices at historical highs, mortgage balances are growing with them. But that doesn’t mean that you have to be saddled with a crushing mortgage for the next 25-30 years. With a bit of planning, and by putting even just a few extra dollars per month on your mortgage, you can pay it down sooner, and save thousands over the life of that mortgage – and the sooner you do that, the sooner you can put that monthly-payment money to other things.
When setting up a mortgage, people generally want/expect/get:
- A good rate (which should be a given these days)
- An affordable payment
- A brief (very brief, in many cases) explanation of terms, privileges, penalties, etc.
- A 25 or 30 year plan and a handshake….
The most overlooked and, in my opinion, the most important, part is a customized strategy to be mortgage-free faster. Simple strategies with small changes to payments can have a massive impact over the lifetime of your mortgage. We all tend to take what we are offered from the bank when it comes to amortization and payments. Thirty years is the new 25 because the payment is lower – but the real cost is much higher.
Let’s look at this example (*calculations using 5 year, 2.59%):
|25 Year Amortization||30 Year Amortization||Difference|
|Interest Paid Over 5 Years||$59,692.37||$60,749.75||+$1,057.38|
|Balance After 5 Years||$423,954.37||$441,022.75||-$17,068.38|
This is a common scenario. Most people can generally afford the higher payment, but choose the lower because they don’t understand the true cost. You will “save” $266 per month, but owe $17,068 more at the end of 5 years. Principal is your money, much the same as a monthly investment contribution. The faster you pay off your mortgage, the sooner you can keep those mortgage payments in your own pocket.
The real key to being mortgage free faster is creating a payment plan that is both realistic and affordable. Here are a few basic strategies:
Strategy Number 1 – Accelerate Your Payments
|Monthly Payments||Bi-Weekly Accelerated Payment||Savings/Gain|
|Initial Amortization||25 Years||25 Years|
|Balance End of 5 Years||$423,954.37||$411,632.87||+$12,321.50|
|Revised Amortization||25 Years||22 Years 3 Months||2 Years 9 months|
This is a powerful and simple start to your plan. By accelerating your payments to bi-weekly you reduce the life of your mortgage by 2 years and 9 months!
Strategy Number 2 – Accelerate Your Payments and Make an Annual Lump Sum
|Bi-Weekly Accelerated Payment||Bi-Weekly Acc. & Annual Lump Sum $2,500||Bi-Weekly Acc. & Annual Lump Sum $5,000|
|Initial Amortization||25 Years||25 Years||25 Years|
|Balance End of 5 Years||$411,632.87||$398,136.93||$565,522.06|
|Revised Amortization||22 Years 3 Months||20 Years 6 Months||18 Years 9 Months|
Again, very powerful. If you are able to put aside an extra $416 per month and apply it to your mortgage, you have reduced your mortgage by 4 years!
Strategy Number 3 – Accelerate Your Payments, Make an Annual Lump Sum and Increase Your Regular Payment Once Annually
|Bi-Weekly Accelerated Payment||Bi-Weekly Acc. & Annual Lump Sum $2,500, Increase Regular Payment by 2% for the first 5 Years||Bi-Weekly Acc. & Annual Lump Sum $5,000,Increase Regular Payment by 2% for the first 5 Years|
|Initial Amortization||25 Years||25 Years||25 Years|
|Payment||$1,131.15||Increase Payment approx. $45 once per year||Increase Payment approx. $45 once per year|
|Balance End of 5 Years||$411,632.87||$388,641.40||$375,145.49|
|Revised Amortization||22 Years 3 Months||18 Years 5 Months||16 Years 11 Months|
A well thought out and diligently executed strategy can and will reduce most people’s mortgages by up to 10 years. Mortgages are big numbers and most of us tend to resign ourselves to what seems like a lifetime of mortgage payments. However, if you consider how much money we pay towards our mortgage each year, the above scenario is $30,000 per year in regular payments on a 25 year mortgage. Imagine if you got to keep that money in your pocket 10 years sooner….This one really shows the huge benefits of tackling your mortgage more aggressively: you could shorten your mortgage by ten years!
Every extra dollar you pay to your mortgage is creating equity in your house. It’s not an expense: it’s an investment. The interest is the expense. You pay interest on what you owe – and you owe it to yourself to stop paying interest.
Not every strategy will work for every person, but the key to this is to sit down with a professional, create a plan and then execute that plan. Do it today!*
* This post originally appeared on Morgan’s web site. You can reach him at 416-481-2903 or email [email protected]