Save yourself thousands of dollars in interest on your mortgage

Just about every homeowner you know, likely has a mortgage.

Just about ever homeowner you know, likely also wishes they didn’t have a mortgage.

The purpose of this article is to provide you with some easy to apply mortgage payment tips that will help you pay off your mortgage years sooner -saving you thousands of dollars in interest. We have previously written about larger scale tips for paying off your mortgage faster (8 Quick Tips for Paying Off Your Mortgage Faster), and also discussed how to determine the true cost of your mortgage (Beyond Rate: Factors in the cost of a mortgage), and here in this article we will be discussing easy to apply strategies for paying off your mortgage years faster.

How to save thousands of dollars in interest on your mortgage

Mortgage Interest Reduction Tip 1: Switch your payment schedule from Monthly to Bi-Weekly

This is by far the most common approach that homeowners use for reducing the life of their mortgage. A bi-weekly mortgage payment is just simply half of your normal monthly mortgage payment, made every 2 weeks.The idea is simple: there are 12 months in a year but 26 bi-weekly periods, meaning that by going with a bi-weekly mortgage payment schedule, you will make an extra mortgage payment every year. Now what is the effect of this type of payment schedule, when compared to going monthly?

For example, let’s imagine that we have 2 homeowners set up $350,000 mortgages at the same time, with 25 year amortizations and a 3% interest rate.

Homeowner A chooses to go with the standard monthly mortgage payment of $1,656.36. At the end of 25 years, Homeowner A will have made mortgage payments in the amount of $496,907, and will have paid $146,907 in interest.

Homeowner B decides to go with the accelerated bi-weekly mortgage payment, which comes in at $828.18 every two weeks. At the end of 25 years, Homeowner B will have made mortgage payments in the amount of $478,857, and will have paid $128,857 in interest.

Simply comparing the two, the homeowner who went with a monthly mortgage payment schedule paid an extra $18,050 in mortgage payments that the homeowner who chose a bi-weekly payment schedule never had to make. When put in the context of a $1,656.36 monthly mortgage payment, that is nearly an entire year less in mortgage payments.

Mortgage Interest Reduction Tip 2: Select a mortgage product that compounds Semi-Annually, at most

Most mortgages in Canada compound semi-annually, however, there are a few mortgage lenders in Canada(bank and non-bank lenders) that offer mortgages that compound monthly. The cost difference between the two mortgage products will surprise many:

Using the same example as above, let’s image two homeowners with $350,000 mortgages, with a 3% interest rate, and a 25 year amortization -but this time, both Homeowner A and Homeowner B have decided to go with a simple monthly payment option.

Homeowner A’s mortgage compounds semi-annually, giving him monthly mortgage payments of $1,656.36, and the total interest paid at the end of 25 years amounts to $146,907.

Homeowner B’s mortgage compounds monthly, giving him slightly higher monthly mortgage payments of $1,659.74, and the total interest paid at the end of 25 years amounts to $147,921.

The difference between two situations adds up to $1,014 in higher monthly payments, along with $1,014 in extra interest paid to the mortgage company. While this difference of approximately $2,000 seems small when compared to the relative scale of a $350,000 mortgage, just imagine what you would do with an extra $2,000(vacation, furniture, renovations, etc).

Mortgage Interest Reduction Tip 3: Apply your income tax refund to your mortgage

This one is simple, when you receive your income tax refund in the spring don’t spend that money. Instead, apply that tax refund to your mortgage, and bring down it’s balance. Making a lump sum payment of even $700 every spring, will take years off of the life of your mortgage.

Mortgage Interest Reduction Tip 4: Make sure you select an Accelerated Bi-Weekly Payment instead of Standard Bi-Weekly Payment

We went over the benefit of going with a bi-weekly mortgage payment in Mortgage Interest Reduction Tip 1 above, however, there is an additional savings you can find by know the difference between two types of bi-weekly mortgage payment types -accelerated bi-weekly, and non-accelerated bi-weekly mortgage payments.

The difference between the two bi-weekly mortgage payment styles is that with an accelerated bi-weekly payment, the mortgage payment you make is applied to the mortgage the day you make the payment, vs non-accelerated bi-weekly payments which are only applied on the first day of the following month. In essence, what is happening with a non-accelerated mortgage payment is that when you make the mortgage payment (on Tuesday the 2nd, Tuesday the 16th, and then Tuesday the 30th), it is stored in the mortgage lender’s account, until the 1st of the next month, when all three payments are applied at once. By comparison, with an accelerated bi-weekly mortgage payment, that payment that you made on the 2nd is actually applied to your mortgage on the 2nd, then again on the 16th, and then again on the 30th. While the difference does not seem like much, with mortgages compounding semi-annually(and even monthly as we’ve learned), that small difference can add up to hundreds of dollars over time.

There are certain mortgage lenders (banks and non-bank lenders) who do not offer accelerated bi-weekly mortgage payment options. It is important that you make sure to ask your mortgage broker if the mortgage product you have offer accelerated or non-accelerated bi-weekly payment options.

Mortgage Interest Reduction Tip 5: Round your payment up to the nearest $100 mark

Another easy to understand mortgage interest reduction tip. By paying a few extra dollars onto your mortgage each, and every month, you’ll pay less interest to your mortgage lender -because you’ll have paid off your mortgage sooner. The method that we recommend homeowners use for rounding up, is to round their monthly/bi-weekly mortgage payment up to the nearest $100 mark. The reason we recommend using $100 increments is because it helps with budgeting -working with whole numbers when trying to add up your monthly expenses is nearly always easier than trying to do the same thing while working with fractions.