Accelerating your mortgage payments
Wednesday, November 15th, 2006
Your monthly payments on your mortgage go to pay both interest and principal on your loan - during early years, the interest component is much higher than your principal. If you have a 30 year loan, during the first year more than 90% of your payment goes towards interest.
Many investors don’t like the idea of having their equity build up slowly, and paying a huge interest component; but given the exigencies, they resign themselves to paying this rather than forego the benefit of home investment. But it doesn’t have to be this way.
Many mortgages will allow additional payments; check if your lender permits this, without any charges or penalties. This provision comes in useful if you have a sudden windfall - a bonus, a share market killing, or other money; you can choose to put a part or all of this into reducing the principal. Make sure that your lender records the principal reduction, and doesn’t treat this as advance payment of instalments.
A second approach is to make bi-weekly payments instead of monthly payments. You make the equivalent of 13 monthly payments instead of 12 - the additional payment helps bring down the interest payment, and can pay off the loan faster.
A third option is a mortgage accelerator program. Currently, very few lenders offer this, but it might become more popular as people discover the benefits. The lender treats the entire loan as a line of credit rather than as a fixed loan; you make arrangements to have your pay directly transferred to this account, and draw out for expenses as required.
The advantage here is that since you draw out money over a month, most of your money is with the lender, and hence the effective interest is lower. Even if your payments are the same as with a conventional loan, it gets paid off faster. In addition, having a line of credit means you could borrow out for emergencies without having to apply again for a loan.
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