My friend, Katherine Martin, helps us understand how we can win at the mortgage game:
One feature of a mortgage is accelerated payments or pre-payment privileges.
Before we get into all the great things that can come from accelerated payments, you need to know that not every mortgage will have pre-payment privileges. No-frill mortgages that have super low rates may seem tempting, but you probably won’t get benefits, like pre-payment privileges.
If you do have these pre-payment privileges, accelerated payments are fantastic….if you use them!
A full-frill mortgage product could have a number of pre-payment privileges including accelerated payments of up to 20 percent of your monthly payment, double monthly payments, and annual payments of up to 20 percent of the full loan amount.
You might be surprised how much time you can knock off your mortgage with accelerated payments.
For example, on a 30-year mortgage, a one-time 10 percent increase on your monthly payment can shave four years off your mortgage. If you bumped up your payment by 10 percent each year, you would be mortgage free in 13 years. If 10 percent is too high, five percent gets you mortgage free in 18 years.
Making a double-up mortgage payment once a year can also cut four years off your mortgage.
Dont forget, anything you put down goes directly to the principal of the mortgage rather than the interest.
If you’re signing a new mortgage, you might be thinking of a short amortization period, like 10 years, because you don’t want to be making mortgage payments well into your golden years. No one really does. But that’s where accelerated payments can pick up the slack.
Instead, it’s worth considering taking that 25 or 30-year amortization and using accelerated payments to make up the difference.
If life throws you a curveball and you’re in a short amortization period like 10 years, you may find yourself stretching to make payments.
Rather than setting a shorter amortization and a payment you’re contracted to make, use pre-payment privileges and accelerated payments to get the amortization you can control, rather than the payments controlling you.
While the benefits are obvious, statistically, not many people will choose to make accelerated payments once the mortgage gets going. If you really want to take advantage, set up accelerated payments the day you sign your mortgage.
If you have any questions, please do not hesitate to contact me.