With all the mortgage talk lately, I decided to blog about getting rid of one! Most home buyers finance their real estate purchases by a loan which they call a mortgage. The word “mortgage' literally translates to mort= death and gage= pledge in latin. Death pledge. We typically carry a mortgage that is spread out over 25 – 30 years. That means this debt will haunt you for 25-30 years!! Why aren't many home owners trying to pay off their mortgages sooner? Is it something we just don't think about? Perhaps, it is a combination of many factors. I think everyone should aim to pay off their mortgage much sooner than 25 years. With this being said, please make sure you seek the advice from a financial expert. I am not an expert in this matter however it is merely an observation.
Here's why I think we need to pay off our mortgages sooner:
Let's take the average price of a house in Red Deer... around $330,000. Most people put 5% down- so let's say for illustration purposes that Family A has a mortgage of $315,000 and Family B also has a mortgage of $315,000. We will use an interest rate of 3% over a 25 year term.
Family A: Makes a monthly payment of $1491 and makes no pre-payments. (Pre-payments are described as extra payments you put towards your mortgage other than your monthly minimum). At the end of the 25 year term, Family A has paid $132,217.00 in INTEREST. Ouch!!
Family B: Has decided to round up their mortgage payment to $1600(an extra $109 a month). Also, instead of doing the regular monthly payments they have decided to do bi-weekly accelerated payments which is $800 every two weeks(adding a few extra payments a year). By doing this, Family B has shortened their term by 4 years - which means they will have no more mortgage payments after 21 years instead of 25. They also ended up saving over $28,000 in interest only. That's quite a chunk!
Now let's say for illustration purposes that Family C did everything that Family B did PLUS added their income tax return at the end of the year. We will pretend that Family C got a return of $2000 each year. Family C would have paid their mortgage off in 18 years and saved $42,000 of INTEREST! Amazing!
Let's say after 5 years each family decided they want to sell their house and move onto something else.... let's say their houses are now worth $330,000. This is how much equity(positive cash) each family would have:
Family A $330,000 - $269,245 (balance owing on mortgage) = $60,755
Family B $330,000 - $253,496 (balance owing on mortgage) = $76,504
Family C $330,000 - $242,564 (balance owing on mortgage) = $87,436
This shows how powerful small changes be!!
Another reason you should pay off your mortgage sooner is because interest rates can rise. A hike in interest can be detrimental to paying down your mortgage. This isn't something we can predict or control therefore the more we pay down the better it will be. Then, when it's time to renew your mortgage you don't have to fear interest changes.
Here are some tips on how you can pay off your mortgage faster:
More frequent payments
Switch from monthly payments to bi-weekly accelerated payments.
If your mortgage payment is an odd number such as $1491, perhaps round up to the nearest hundredth like $1500 or if you really want to get saving, $1600. Most lenders allow 20% prepayment lump sum each year and/or 20% increase of your mortgage payment. Check with your lender first.
Use any unexpected amounts of cash you receive towards your mortgage. For example, income tax refund, inheritance, promotion at work, gifts, bonuses at work. Most lenders will allow you to pay up to 20-25% of your mortgage prior to your term ending.
Depending on your circumstances, maybe it's not a bad idea to increase your mortgage payments instead of contributing to an RRSP;s. Or simply use the income tax refund at the end of the year towards it.
While I understand Roomates may not be convenient for everyone- some home owners find it a great way to increase income and pay off the mortgage faster. Rooms can rent anywhere from $300-$800 a month!
With all this being said, the fact you have a mortgage and you aren't paying rent anymore is really great thing. You can see how over the years the equity does build up quite quickly. However, we get lost in that idea and don't realize how a few small changes can really make a big difference. Nobody wants to be paying debt off forever! And for those of you who already do these things- thumbs up! If you have any questions in regards to the financial side of things- please contact me today and I can recommend an appropriate mortgage broker, financial coach, financial advisor or bank associate to cater to your needs.
Your Realtor - Melissa Morin
Century 21 Advantage