The final days of fall are upon us! Here, we provide our end of autumn market update to see where things stand here in Halifax.
Making monthly mortgage payments is a standard part of being a home owner, and this is true for anyone who has ever bought a property. The longer you make your payments, the more equity you build, and the closer you come to paying off your mortgage completely. Now, what if you’re looking for ways to pay down your mortgage faster? That’s where a lump sum payment comes in!
Lump sum payments are, as they sound, a way to pay a big chunk of your mortgage at once to reduce your borrowing costs. They can be beneficial for the right borrowers, but first, you need to consider the pros and cons.
What are the benefits?
Making a lump sum payment has some distinct advantages. The big benefit to focus on here is the money you will save in the long run. When you make a big payment, this of course means you will owe less on the remaining balance of your mortgage. The lower your principal amount, the less impact interest will have on your monthly payments. Not only that, but you can also have your mortgage fully paid off quicker, so there will be fewer months of making those payments. A shorter amortization period, with lower borrowing costs, is the biggest advantage of making a lump sum payment for long term gain.
Some lenders even offer a “payment vacation” to eligible borrowers. A payment vacation is available with some products for borrowers who are paying down their mortgage ahead of schedule, through prepayments or lump sum payments. This vacation means you can take time off from making your monthly payments, because you have made enough prepayments to cover a certain period of time. A temporary break from making monthly payments can feel like a relieving option to fall back on. However, keep in mind that taking a payment vacation means your prepayments will be used to cover the months you miss. This means you will lose any lead you had on paying off your mortgage ahead of time. While it’s a good option for some people, it needs careful consideration!
What are the drawbacks?
As ideal as it sounds to make lump sum payments and prepayments to clear your mortgage debt early, it’s not a realistic situation for everyone. Remember that the payment amounts themselves do not decrease, meaning you will still owe every cent from that principal balance. You may be saving money on interest, but you’re not reducing your actual debt. Even though you will shorten your amortization period and save money long-term, your monthly payments will likely increase. This can be difficult for some borrowers to manage, so it’s important to ensure you can handle higher payment amounts.
Prepayments and lump sum payments will take away a chunk of your extra income. If you find yourself in need of more cash flow, you may have to refinance your mortgage to access some of that equity. While refinancing isn’t a bad thing, it can be a bit of a process and can cost you if you have to pay any penalties. Be realistic about your finances before committing to drastically increasing your payments!
Also keep in mind…
Make sure you’re familiar with your lender’s requirements when it comes to making prepayments or lump sum payments. Making extra payments that violate your mortgage contract can cost you a lot of money in mortgage penalties. This would defeat the purpose of saving money by making extra payments in the first place.
Some lenders have flexible mortgage plans where you can freely speed up or slow down your mortgage payments, and you can vary your payment amounts. These products are great for lump sum payments, as you won’t have to worry about prepayment penalties.
Lump sum payments and prepayments can offer great opportunities for borrowers looking to get ahead of their mortgage schedule. If you’re in a position to make these payments, and your mortgage contract allows it, you can benefit long-term. Make sure to discuss your options with a mortgage broker before making this decision to ensure it’s the right path for you!
If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.