No one likes the idea of spending more money on interest then what you absolutely have to. However, making the most cost effective decision, to deter interest, is not always so obvious! Interest and amortization have a way of playing with the numbers. How to maximize your cash, and find yourself closer to mortgage free, is what’s most important! Let me prove to you how you can save yourself a significant amount of money, by simply applying your cash in the right order!
Every commitment letter gives opportunity to prepay your mortgage anywhere from 10% to 20% a year, depending on the lender. This privilege is in addition to your right to pay your mortgage payment in different intervals, besides the traditional monthly payment, including: semi-monthly, bi-weekly, accelerated, or weekly accelerated.
It is commonly ‘believed’, that if you have 20% of your purchase price available when you purchase your real estate, your best option is to put that sum directly towards the down payment. Logically, you would think that this makes the most sense. After all, how can you pay interest on money that is not even borrowed? Well, the proof is in the bottom line, which is everyone’s concern, so let’s prove what really is true!
Below is a comparison using a 20% down payment, versus 5% down, and then maximizing on your payment privileges. Take a look at our mortgage details:
- Purchase Price: $300,000
- Interest Rate: 3.09% over 5 years
- Amortization: 25 years
- Payments: Bi-weekly accelerated
- 20% Down Payment: $60,000
Scenario 1 demonstrates what happens when you sink your 20% in immediately at the time of purchase:
5 years later, your mortgage payout is $199,005.91. Along with the option to use bi-weekly accelerated payments, you’ve shaved down the amortization from 25 years, to 22 years, meaning you’ll be mortgage free 36 months sooner!
Scenario 2 demonstrates what happens when you put the minimum 5% down, $15,000, and pay your mortgage insurance premium. After taking possession of your real estate, you then put the remaining $45,000, as a lump sum deposit. You’ve now taken full advantage of your prepayment privilege, and the deposit has gone directly to your principal! Not a penny of this cash is applied to interest.
5 years later, your mortgage payout is $190,477.64. Along with the option to use bi-weekly accelerated payments, you’ve shaved the original 25 year amortization, down to 17 years 8 months, bringing you 7 years, 4 months sooner to mortgage free liberty!!
Please keep in mind, your payments are somewhat higher in the second scenario, although, the benefits speak clearly for themselves! The difference between these two options represents a savings of $8,528.27!!
Questions about your mortgage options? Give me a call!
Blogged by Elise Hildebrandt, AMP, Mortgage Associate Broker Lic#316103 at The Mortgage Centre Brokerage Lic# 31547, Saskatoon Elise has been in the financial industry for 16 years.