Latest President's Pen: Hate having a mortgage? Pay it down faster - and smarter!

Let's face it: no one enjoys being in debt. However, the majority of home buyers do need to take out a mortgage loan, which can be considered "good" debt since your investment is likely to appreciate over time, and paying down the loan helps you build equity that you can use later.

But no matter how good the end result is, many people don't want their debt hanging around for 25 years or more. The good news is, there are ways to pay down your mortgage faster - without having to live on hot dogs for years.

Payment frequency is one way to accelerate your repayment without eating up all of your spare cash. By making payments every week or every other week instead of monthly, you will make the equivalent of at least 2 extra payments each year without significantly increasing the amount of your individual payments. Most, if not all major lenders now offer mortgage payment frequency options - just ask.

Another way to get debt-free faster is to make additional payments when you have extra cash. Many mortgages allow you to make a lump-sum payment on the anniversary date of your mortgage, or make an extra mortgage payment once every year (perhaps at tax refund time). You can also raise the amount of your regular payments if you get a raise at work, for example.

If your financial circumstances change significantly for the better, you may want to consider asking for a shorter amortization period when you renegotiate your mortgage (which you will do each time the term expires, usually every five years). Going from a 25-year to a 15-year amortization will increase your payments significantly, but if you can afford to do it now, you'll end up paying far less in interest over the life of the loan.

It can be tempting, in the event that you get a sizeable raise or inherit a sum of money, to just pay off the mortgage all at once, but be aware that depending on your lender and the terms of your loan, there may be significant fees charged for the privilege of doing so.

When you pay off your mortgage earlier than planned, the lender loses you as an interest-payer, which is why most closed mortgages include fees or penalties charged to those who finish paying early. The most common penalties are an Interest Rate Differential (calculated using your interest rate, the current market rate, and how long is left in your term) or three months' interest. Always read the fine print carefully before you sign your mortgage documents. By law, mortgage lenders must indicate in writing whether there are penalties for early repayment and how they are calculated. That way, you can make an informed decision about whether it's worthwhile to make that last lump-sum payment or set the money aside and wait it out. The difference between the penalty fee and the interest you would save is usually the deciding factor.

Mortgages are great, because they allow you to purchase a home and build equity. But why pay more interest than you have to? If you're financially savvy, you can end up debt-free faster - and pay less interest while you're at it.

The President's Pen column was prepared by the Ottawa Real Estate Board and first appeared in the February 24, 2011 issue of the EMC community newspapers.

Vicki McDougall

Vicki McDougall

Sales Representative
CENTURY 21 Explorer Realty Inc., Brokerage*
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