Chapter 3: Understanding your mortgage

Understanding mortgage payments

A mortgage payment is generally made up of principal and interest. In some cases, some other fees and charges make up your payment. This section will breakdown your mortgage payment, so you completely understand what you are paying each month.

 

Principal – the portion of your payment that is applied directly to your mortgage balance.

 

Interest – the portion of your payment that is applied to accrued interest on your principal balance.

 

Lender Fee – some lenders will add fees related to insuring their mortgages and pass this fee on to the borrower. 

 

Property Taxes – some lenders will collect property taxes from you each month and forward these payments to your municipality on your behalf.

 

Creditor/Disability Insurance –  if you have elected to obtain creditor and/or disability insurance, the premiums may be rolled into your mortgage payments. These insurance policies financially protect you and your family in the event of accidental death or disability.

Subheading: Tips to pay off your mortgage faster

 

After going through the entire process of qualifying for a mortgage, buying a home, and making your monthly mortgage payments, you cannot help but wonder how you can pay off your mortgage quicker. Well, we are here to help with some tips that will save you time, money and will help you pay off your mortgage as quickly as possible.

 

• Consider changing your payment frequency and amount.

Simply switching from monthly payments to bi-weekly accelerated payments is a great way to pay off your mortgage faster. Accelerated bi-weekly payments enable you to pay an extra month’s payment in the calendar year (spread out over 26 payments), which will help reduce your mortgage principal in the long run, saving you thousands in interest and reducing the lifetime of your mortgage.  

 

Another great tip is to round up your mortgage payment. For example, if your current mortgage payment is $447 bi-weekly, consider increasing it to $500 bi-weekly. The extra $53 per payment will help to reduce your mortgage considerably over the lifetime of your loan, and you most likely won’t notice a difference in your monthly budget.

 

• Reduce your mortgage amortization schedule.

Reducing your amortization will set you up to repay your mortgage loan in full sooner, saving you thousands of dollars in interest along the way.

 

• Take advantage of prepayment allowances.

Most mortgage contracts allow you to make annual prepayments towards the principal balance you owe. Prepayment allowances can range anywhere from 10% to 20% of the original principal amount. Since these annual lump sum payments are applied directly to the principal, you can significantly reduce the amount of interest you pay, saving thousands of dollars. 

 

Taking advantage of annual prepayments is a foolproof way to pay off your mortgage quicker and reduce the amount of interest payable on the loan. 

 

• Put your raise or bonus to work.

If you’ve received a raise at work or a year-end bonus, consider applying these amounts directly to your mortgage instead. Since you are used to living on your current salary, you won’t miss the money, and as a bonus, your mortgage is being paid off quicker!

 

• Use your tax refund.

Consider using your tax refund as a prepayment towards the principal balance of your mortgage. 

 

• Moving? Take advantage of mortgage portability. 

Mortgage portability allows you to “port” your mortgage to your new property, maintaining the current terms of your mortgage contract and avoiding any early payout penalties.