6 ways to save thousands on your next mortgage
Unfortunately, unless your last name happens to be Buffett or Gates, you’re going to have to take out a mortgage to buy your dream home. Or, even just a decent, regular old house. I know, it stinks.
You’d rather be out of debt, enjoying the sunshine on your deck, not the bank’s deck. Mortgage debt is like a noose around your neck, and you want rid of it as soon as possible. Hey, I don’t blame you, not one bit. Paying off that mortgage is going to take all sorts of sacrifice, commitment, and general personal finance know-how. Once you’ve got that bad boy paid off though, it’ll be worth all the extra work.
But why make things hard on yourself? These 6 tips will make paying off that mortgage easier.
The first one is a no-brainer. The longer you’re in debt, the more interest you’ll end up paying.
For example, if you have a $200,000 mortgage at 4%, you’ll end up paying $115,612 in interest if you finance your house for over 25 years. If you cut that down to 20 years, you’ll cut that down to $90,038. You can save $25,000 just by cutting 5 years off your amortization.
Yes, your monthly payment will go up, but only about $150 per month. You’ll eat away at your principal much faster with a 20-year loan than with a standard 25 year. (Not to mention the super-long 35 and 40-year amortizations that were available in Canada for a while) If you’re feeling really ambitious, you can save thousands more by lowering your amortization to 15 years.
Can’t afford a 15-year amortization? That brings us to point 2:
Buy less house
Even with today’s super low-interest rates, you still end up buying your house about one and a half times. You pay back all the principle, while the bank takes about half the value of the house in interest. As interest rates rise, so will the percentage the bank takes as interest.
If you can find a way to buy $20,000 less of a house, you’ll save at least $10,000 over the life of your mortgage, plus the original $20,000 to begin with.
These days, most people have way too much space anyway. They buy with potential future needs in mind, rather than focusing on what they need today. If you take a long, realistic look at how much space you really need, you could probably end up downsizing your expectations.
This is an old trick, but one worth mentioning nonetheless. Bi-weekly accelerated mortgage payments take your normal monthly payments, divide them by 2, and then you make that payment every 14 days, rather than every 15 or 16 like you would with semi-monthly payments.
Make sure you go with bi-weekly accelerated payments. If you go straight bi-weekly, your payment will be adjusted so you’re paying the exact same amount per year as you would be if you paid monthly.
Just by making the switch to bi-weekly accelerated payments, you can knock 4 years off your mortgage.
Obviously, it’s important to shop around when you get your mortgage. The internet has made searching for mortgage rates pretty easy, and mortgage brokers will always be around to find you the lender with the lowest rate. Consumers are, for the most part, getting pretty good at weighing their options before they commit to a mortgage.
Where consumers are still pretty bad is at renewal time. Most Canadian mortgages have terms of 5 years, although terms are available anywhere from 1 to 10 years. After their term is up, the borrower has to sign up for a new term. And, more often than not, they just renew with their current mortgage holder. Sure, it’s a bit of a pain, but shouldn’t you be willing to do a few hours work to save a few thousand bucks over 5 years?
Get the right product
Did you know that the majority of people who choose a 5 year fixed mortgage never actually make it to the end of their term? They either move, or refinance, or whatever.
If you’re not 100% certain you’re going to be living in your home for the next 5 years, you’ll want to look at a shorter term. If you break a mortgage before the term is up, you’re looking at a penalty of 3 months interest. Depending on how much you owe, that penalty could be worth thousands of dollars.
Most mortgages will let the borrower pay up to 20% of the value of the mortgage of every year, without incurring a penalty. On the fictional $200,000 mortgage from earlier, that’s $40,000 per year you could pay down.
Even if you just paid a couple of thousand dollars per year, those add up and will end up knocking a couple of years off your mortgage. Plus, every time you use your prepayment privileges, all that extra cash goes directly onto principle. You end up with a slightly smaller mortgage every time you do that.
Too many people are just content to pay their mortgage for 25 years and pay thousands of dollars in unnecessary interest. If you follow these tips, you’ll knock years off your mortgage, and be well on your way to financial independence. Besides, it’s a lot easier to save for retirement without having a mortgage.