Here’s part 9 of my 10 step series on mortgages here at Financial Uproar every Wednesday. Every step of the process will be covered from the application to qualifying to tips and tricks to save money on your mortgage and everything in between. To read all of these just click on the category Mortgage Basics.
Part 9 of 10 today everybody. Only one more week remaining. This week, let’s discuss some tips on how to save money on your mortgage. If you have any that I’ve missed, feel free to add them to the comments.
The easiest and least painful way to save some significant coin over the life of your mortgage is to switch the payment frequency from monthly or semi-monthly to bi-weekly. Let’s look at a standard $300k mortgage, with a 5 year fixed rate at 4% and a 25 year amortization to see how much you’d save.
If you were to pay monthly, your payment would be $1578.06.
If the same mortgage were to be paid bi-weekly, the payment on the same 25 year amortization would be $727.69. The problem with a standard bi-weekly payment is that it pays off the mortgage at the same rate as a monthly payment.
What a borrower needs to do is ask their lender for a bi-weekly accelerated payment. The bi-weekly accelerated payment would be exactly half of the monthly payment, except made every days instead of 15 or 16. That one simple step can cut the above mortgage from 25 to 21.9 years just by paying $789.03 every two weeks.
Remember, the borrower has to ask the lender for bi-weekly accelerated payments, not just bi-weekly.
Pick The Right Product
As discussed in the fixed vs. variable debate, many mortgage borrowers pick the 5 year fixed term almost by default. They want the security of knowing that their payment will be the same throughout the term. Many borrowers overpay for this privilege, leading to many thousands of dollars in additional interest over a 25 year amortization.
The first alternative is to choose a variable rate. Typically these mortgages can be had at a 1.5% discount to the comparable fixed rate product. If a borrower knows they’ll stay in the same home for the next 5 years, a 5 year variable mortgage is a solid choice.
Alternatively, a borrower can take a shorter term fixed mortgage, from 1 to 3 years. If a borrower knows there’s a chance they’ll be selling the house in the next couple of years, a shorter term can save thousands in a mortgage payout penalty. The short term fixed products won’t have the same discount as the variable products, but they’ll still be cheaper than a 5 year or longer fixed mortgage.
If a borrower knows they want to sell their house soon, they should always take an open product. They’ll pay a little higher rate in interest, but avoid all payout penalties.
The higher the down payment, the more a borrower will save in interest over the life of a mortgage.
The other benefit to having a large down payment is the borrower will save in CMHC insurance fees. If the borrower puts down more than 20%, they can avoid the fees all together. If a borrower puts down 15.1%, they will pay 1.0% for their mortgage insurance. The premium gradually goes up, peaking at 2.75% for a 5% down payment. On a $300,000 mortgage, the 1.75% spread represents close to $6000. Avoiding CMHC fees in general by putting down 20% or more will save a borrower thousands.
This tip is fairly obvious. Most mortgages will allow a borrower to pay up to 20% of the balance each year, without paying a penalty. Many borrowers don’t take advantage of these, which can not only save thousands, but shave years off a mortgage.
The “no frills” mortgages don’t allow prepayments, so a borrower has to be careful to read the fine print if they choose this product.
Prepayments don’t have to be a huge number to make a huge difference. 2 extra payments per year can cut almost 5 years off a mortgage.
Shop Around At Renewal Time
When a mortgage term expires, the lender will usually approach the borrower about a new term, typically sending the borrower a letter outlining the various terms and rates available from the lender. Most borrowers pick another 5 year fixed term and move along with their lives.
Banks are well aware of this, and therefore don’t offer their best rates in the renewal letter, hoping uneducated borrowers don’t bother to shop around.
Buy Less House
If a house costs less to buy, it definitely costs less in interest.
Stay tuned next week, for the finale of the Mortgage Basics series.