Is it smart to buy a home if you have debt? Here, we discuss how debt impacts your home buying abilities, and when it really matters.
Many homeowners dream of the day their mortgage is fully paid off. No more monthly payments, which means no more stressing about mortgage expenses. You’re likely wondering how – or if – you can pay your mortgage down faster!
There’s no doubt that mortgage terms can be complicated. Each person’s mortgage will look a little different depending on their lender and terms, but that’s not to say it’s impossible to find ways to pay yours off faster. First, get the details of your mortgage straightened out. Then, you can think about how you can move forward!
Your mortgage type
Open vs closed
Your ability to pay down your mortgage faster might depend on whether you have an open or closed mortgage. An open mortgage gives you more freedom and flexibility with your payments, so you can pay it off any time. There’s no punishment for paying your mortgage off early, and you can also usually switch between fixed and variable rates easily.
A closed mortgage comes with firmer rules and terms you must follow. Your lender will expect you to make certain payments on a defined timeline. Breaking these terms by paying your mortgage off too early results in penalties.
Fixed vs variable rate
A fixed rate mortgage will have the same interest rate throughout the mortgage term, no matter how interest rates may rise or fall. They’re based on the existing rates at the time you secure the mortgage, and they won’t change. In 2021, fixed rate mortgages are generally a good bet. Rates are basically at their lowest point possible, so it’s a good time to commit to these existing rates.
A variable rate mortgage is subject to change, according to how interest rates fluctuate. This is determined by the Bank of Canada prime rate. You might end up paying more or less interest over time, depending on how the prime rate changes.
When to refinance
Sometimes, there’s no good way to pay your mortgage down faster. This is especially true if you have a closed mortgage, and you have limited flexibility in your payment timeline and type of rate. In this case, it might make more sense to refinance. You can refinance your mortgage for a lower interest rate, or you can switch between a fixed and variable rate. Perhaps you can also make a change in the loan term, which can help you save money and pay off your mortgage faster.
Make more frequent payments
Increasing the number of times you make payments can be a great way to pay your mortgage down faster. Payment frequency options are typically monthly, semi-monthly, bi-weekly, or weekly. Monthly payments are most common, perhaps because they feel somewhat similar to a monthly rent expense. You can read more about the types of payment frequencies here to see if one might be better for you.
In a similar vein, you can also look into increasing the amount you pay with each contribution. If you can put more into each payment, you’ll naturally pay off your mortgage more quickly. Even adding an extra $50 – $100 can have a huge impact over time. Keep in mind that you shouldn’t contribute all your money to your mortgage payments, even if you can “technically” afford it. You should always have extra money for other expenses.
Depending on the terms of your mortgage, you might have the benefit of a prepayment privilege. This is when a lender allows you to put a set amount of extra money towards your mortgage, separate from your regular payments. This means you can make additional payments, or increase your payment amount, without consequences.
There’s usually a maximum prepayment amount that comes with this privilege, so be mindful of your lender’s terms. However, this can be an excellent way to pay off your mortgage faster! You can review your contract to see if this is an option for you.
Shorten the length of your loan
You might be able to renegotiate the terms of your mortgage for a shorter loan term. For example, if you currently have a 30 year mortgage, you might be able to cut it down to 20 years. This will mean paying bigger amounts with each payment, but you’ll pay off your mortgage faster. Shorter terms also usually come with lower interest rates, so you’ll end up owing less in the long run.
Talk to a broker first!
The prospect of paying off your mortgage quickly is exciting, but don’t do anything without consulting a mortgage professional! You need to go through all your options to see if you’ll face any big penalties for making changes to your mortgage in any way. Faster mortgage payoffs aren’t worth the costs of these penalties. You can read more about the kind of penalties you might be facing here.
If you’re hoping to pay your mortgage down faster and don’t know where to start, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.