Paying off a mortgage as fast as possible is a controversial topic. A mortgage is usually the largest debt one can have and it’s astounding that it can take up to 30 years to pay it off. The faster you pay off a mortgage, the more money you will save. However, the timing of paying off this huge loan is important and requires planning.
Here we will dive into WHY you should pay off a mortgage faster, WHEN is the best time to do it and HOW to do it.
WHY you should pay off a mortgage faster?
The best reason to pay off a mortgage faster is to save money. Savings could be thousands of dollars. Thousands. You will pay less interest to the bank and more money will stay in your pockets. You work so hard for your money, so why let the bank have more of it than necessary?
Imagine what would it be like if you are mortgage free today with no more mortgage payments. What can you do with that money now? For many it will give financial independence and financial freedom. Being mortgage free gives you the option to work less and/or retire earlier. If you are control of your money you can do this. Furthermore – you own your home and there is less stress about debt.
WHEN is the best time to focus on paying off a mortgage?
Paying off a mortgage faster may not be right for everyone depending on life circumstances and financial situation. To determine if it’s the right time, you need to assess your family’s goals and priorities. Once there is financial stability and direction, one can look at paying off a mortgage faster.
Pay off other high interest debt
The best time to focus on paying off a mortgage is when you have minimal or no other outstanding high interest debt. Assess to see what about debts you have first. Ideally you want to focus on eliminating higher interest rate debts such as credit card loans or car loans.
Take a look at Budget Girl Kylie’s article on “Get of out debt.” She goes through 2 different effective methods to pay off debt. Once other debts are cleared, it is easier to put more money towards the mortgage.
Emergency Fund
Building up an emergency fund is essential for financial security. It is not optimal in trying to pay off your mortgage faster if you don’t have an emergency fund to cover situations such as illnesses or a job loss. Having an emergency fund for these circumstances will help you continue to make those mortgage payments and to avoid going into debt.
HOW to Pay off a Mortgage Faster
When you are ready let’s see how you can pay off this mortgage faster! You should understand your current mortgage and budget to be able to figure out how to effectively do this.
Understand your mortgage
What is the current mortgage payment and how often does it occur?
What is the principal left on your mortgage?
How many years are left until you pay it off (if you were to continue with the same rate)? (Amortization years)
What is the time left on your current mortgage?
Find out what changes you are allowed to make to your mortgage to avoid penalties. How many times a year are you allowed to change your payments? How often you able to put in a lump sum payment? What is maximize lump sum amount annually?
Mortgage Calculator
Now that you have a base understanding of your mortgage, use a mortgage calculator to see how you can reduce the years lefts on your mortgage by:
- Changing the frequency of your payment
- Increasing the amount of each payment
- Making lump sum payments
- Refinancing at a lower rate
Financial Mentor – Mortgage Calculators
Scotiabank Mortgage Calculator
Understand your Budget
If you have a budget already – how can you make it work in your budget to incorporate the variables that you changed in step 2 with the mortgage calculator?
If you don’t have a budget yet – start here with Budgeting 101. Having a budget is important to know that you are able to make those payment changes without causing extra stress in your finances.
Using a budget will help you balance your finances. There may be other financial obligations that you are committed to such as saving for your kids’ education, your retirement, and saving up for a family vacation or a new car. You need to balance these financial goals with paying off your mortgage.
Any improvements you make to your mortgage payments will help you out in the long term. Even if you can shave off a few years it will help you save money and propel you to financial freedom sooner.
7 Effective tips to decrease your overall mortgage cost and to become mortgage free faster
Here are 7 tips for those with a current mortgage and for those who are looking to buy a new home:
1. Save for a bigger down payment
In Canada aiming for a 20% down payment will help you to avoid mortgage loan insurance fees. A larger down payment is the single biggest thing that help you lower your mortgage cost. You will owe less money to the bank and pay less interest.
2. Buy a home that fits your budget
You may get approved for a large loan, but it doesn’t mean you can actually afford it. Work out a budget to make sure you can comfortably pay the mortgage payments. A larger home comes with more expenses (more home furnishings, maintenance, property taxes etc). Perhaps you may want to downsize to a smaller home.
3. Understand options for making extra mortgage payments
Ideally you want to go with a mortgage lender that offers the best rate AND the flexibility to make extra mortgage payments that fits your needs. How often can you put in lump sum payments, change regular payment amounts and the frequency of payments? A smaller institution may offer you the lowest rate, but they have restricted options for making extra mortgage payments. Use a mortgage calculator to see to determine if you would save more money with this mortgage lender.
4. Select a lower amortization period
A lower amortization period equates to lower interest costs and paying off a mortgage faster. This would mean higher regular payments. Find a balance. When you go to renew your mortgage, also consider decreasing your amortization period.
5. Go for accelerated payments
Increasing your payment frequency will save you thousands of dollars in interest. Choose bi-weekly or weekly payments. This will involve a few more extra payments per year, thereby reducing your mortgage faster.
6. Go for lump sum payments
Any extra money above and beyond your regular payments will go directly towards the principal. Check with your mortgage lender on how often you can put in lump sum payment and the maximum amount annually to avoid penalties.
7. Increase your regular payment.
When you increase your regular payments it will save you money and decrease the number of years left on your mortgage. Even if you can increase your regular payments by $25 it will make a huge impact. Use a mortgage calculator to see how soon you can be mortgage free.
I advocate for paying off a mortgage as fast as you can in order to save money and to achieve financial independence. Being free from a mortgage opens up so many doors – such as giving you the ability to work less, retire early and to enjoy life to its fullest. It is best to pay off higher interest rate debts and to have an emergency fund built up first before focusing on paying off a mortgage faster. Understanding your current mortgage and budget will allow you to determine how to make changes to your mortgage payments to pay off this loan faster.
What is your plan to pay off your mortgage faster?
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Disclaimer: I am not a financial planner or expert. All information in the post is my opinion and should not be used as financial advice. This is based solely on my experiences. Any action you take based on the recommendations from this blog is at your discretion.
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Being mortgage free also has another positive side: the feeling of owning your home outright!
Very informative thanks for the info
I will have to save this for the future
Good luck Kennedy! Hope this article had given you ideas on how to do so!
The thing that worked for us was the bigger down payment. Also, we did quite a few lump sum payments of whatever we saved. Being mortgage free is the greatest feeling and I recommend everybody should try to do it as soon as possible. The great tips that you have provided can be very helpful for many new home buyers.
Hi Nadia! Congrats on being mortgage free! I can’t wait till when we get to that point. How long did it take for you to pay off your mortgage?
Great ideas! We just bought a condo with the intention of paying it off early and then renting it out for profit. I think more people should focus on paying off their mortgage early!
Congrats on being a home owner! We had started off with a condo as well and then eventually moved into a home that would fit our family. Even till now we are still renting out our condo. Yes! I hope I have motivated people to look at how they can pay off their mortgages faster!
We’ve been paying an extra $500 a month toward our mortgage for the past year or so and have calculated that this will pay it off 7 years early! I’m glad you mentioned that people should be debt free and have money in savings before focusing on paying down their mortgage. That’s really important!
7 years! That’s so awesome. 7 years that you won’t have to put in a mortgage payment!
In my 30s I learned the importance of saving, paying off things faster. I don’t have a mortgage yet. I’m just in step 1, saving for a large down payment while paying off student loans, credit cards, car notes, the works. It’s not easy but planning is key. This gave me a lot of good info. THANKS for sharing.
Yes, I so agree… planning is key. It’s really scary that some jump into home ownership without have a long term plan. Good luck with your finances Melissa!