• Mike Hidlebaugh

Become Mortgage Free By Using Your Prepayment Privileges

You can reduce the amount of money you spend on your mortgage significantly and in turn reduce the amount of time it takes to pay off the loan by taking advantage of your prepayment options! You can be mortgage free sooner by following three simple steps! 1. Know your prepayment privileges Knowing what your prepayment privileges are, is essential to paying down your mortgage faster. Most mortgages provide some sort of prepayment privileges, but not all mortgage providers provide the same prepayment privileges. The amount or percentage of your total mortgage you can apply can vary amongst lenders. The frequency in which you can utilize prepayment privileges also varies so it is important to understand these. Many lenders allow you to either increase your payment or put a lump sum down once a year. It is important to fully understand your prepayment privileges to take advantage of them.

2. Increase your payments Increasing your payments is a great way to reduce the overall interest you pay over the term of your mortgage. Any increase to your payments goes directly to your principal. Lenders generally allow you to increase your payments 10% to 20%. Some lenders permit you to double up your payments with the extra payment going directly to principal.

Prepayments being used on a typical mortgage:

All calculations are based off of a $300,000 mortgage with a 5 year term and 25 year amortization at a rate of 2.94% with monthly payments.

No Prepayments: Monthly payments: $1,410.52 Principal paid over 5 year term: $43,872.66 Interest paid over 5 year term: $40,758.54 Mortgage amount remaining: $256,127.34 Years remaining on mortgage after 5 years: 20 Years

Adding a 20% Prepayment: Monthly payments: $1,692.62 Principal paid over 5 year term: $62,073.82 Interest paid over 5 year term: $39,483.38 Mortgage amount remaining: $237,926.18 Years remaining on mortgage after 5 years: 14 years & 4 months This example shows that you can save a significant amount of money in interest. The total mortgage amount remaining after 5 years was reduced by $18,201.16 and there was $1,275.16 in interest savings. This was all within the 5 year term. 3. Make a lump sum prepayment If you have the ability to make a large lump sum prepayment it will pay down your mortgage faster. Lump sum payments allow you to reduce the amount of interest you will pay on your mortgage as it is applied directly to the principal. If you were able to put a lump sum of 5% of your original mortgage amount down each year of the 5 year term you would have an extra 25% of your mortgage paid off at the end of that 5 year term.

Lump sum payments can be made annually and the percentage permitted will depend on the lender. They are typically available to be made once a year, often on any payment date, with some lenders restricting it to the anniversary date.

There are a variety of ways to make prepayments, but in all there is one clear benefit: achieving mortgage freedom sooner!



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2018 Mike Hidlebaugh Mortgage
Mortgage Associate Licence: 316894

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Brokerage Licence: 316176