How Do Prepayments Affect My Mortgage
When you obtain a mortgage from a lender, your mortgage usually allows you to prepay some or all of your mortgage in one or two different ways.
An "open" mortgage allows you to prepay any amount on your mortgage at any time. For example, if you have a $100,000.00 mortgage and you are currently making mortgage payments of $268.72 every two weeks at 5% interest, you have the option of paying an extra sum of money toward your mortgage at any time. It could be an extra $500.00 that you have saved, or it can be the entire balance owing, if you won the lottery (lucky you!).
If you have a "closed" mortgage, this means that you are more restricted in the amount of money that you can prepay on your mortgage. Depending on the terms of your specific mortgage, you can usually prepay up to 15% of the original amount of your mortgage once a year, or you can increase the amount of your mortgage payment by 15% once a year, although these terms can vary from mortgage to mortgage. The exact details can be found in your copy of the "Standard Charge Terms" for your mortgage. The number of the Standard Charge Terms can be found on your mortgage document, or you can get a copy from your lawyer or your bank.
Let's say you have a $100,000.00 mortgage with a closed 5 year term, meaning you are making fixed mortgage payments for a term of 5 years. Your payments are $295.67 every two weeks at 6% interest. Your Standard Charge Terms indicate that you are entitled to prepay up to 10% of the original amount of your mortgage once a year, or you can increase the amount of your mortgage payment by 10% once a year. Therefore, your options for this year are to either increase your mortgage payments to $325.24 every two weeks or to pay $10,000.00 down as a prepayment on your mortgage. How would either of these options affect your mortgage?
If this was the first year of your 25-year mortgage and you prepaid $10,000.00, this would save you approximately 5 years of mortgage payments, or $38,437.10. In 25 years, your $10,000.00 investment has almost quadrupled in value.
Alternatively, if, during the first year of your mortgage, you increased your mortgage payments by 10% from $295.67 to $325.24 every two weeks, the would have approximately the same affect on your mortgage, by saving you almost 5 years of mortgage payments.
Remember that these options are available to you each and every year that you have your mortgage.
If becoming mortgage-free is your goal, consider making a prepayment on your mortgage and watch the years disappear!
An "open" mortgage allows you to prepay any amount on your mortgage at any time. For example, if you have a $100,000.00 mortgage and you are currently making mortgage payments of $268.72 every two weeks at 5% interest, you have the option of paying an extra sum of money toward your mortgage at any time. It could be an extra $500.00 that you have saved, or it can be the entire balance owing, if you won the lottery (lucky you!).
If you have a "closed" mortgage, this means that you are more restricted in the amount of money that you can prepay on your mortgage. Depending on the terms of your specific mortgage, you can usually prepay up to 15% of the original amount of your mortgage once a year, or you can increase the amount of your mortgage payment by 15% once a year, although these terms can vary from mortgage to mortgage. The exact details can be found in your copy of the "Standard Charge Terms" for your mortgage. The number of the Standard Charge Terms can be found on your mortgage document, or you can get a copy from your lawyer or your bank.
Let's say you have a $100,000.00 mortgage with a closed 5 year term, meaning you are making fixed mortgage payments for a term of 5 years. Your payments are $295.67 every two weeks at 6% interest. Your Standard Charge Terms indicate that you are entitled to prepay up to 10% of the original amount of your mortgage once a year, or you can increase the amount of your mortgage payment by 10% once a year. Therefore, your options for this year are to either increase your mortgage payments to $325.24 every two weeks or to pay $10,000.00 down as a prepayment on your mortgage. How would either of these options affect your mortgage?
If this was the first year of your 25-year mortgage and you prepaid $10,000.00, this would save you approximately 5 years of mortgage payments, or $38,437.10. In 25 years, your $10,000.00 investment has almost quadrupled in value.
Alternatively, if, during the first year of your mortgage, you increased your mortgage payments by 10% from $295.67 to $325.24 every two weeks, the would have approximately the same affect on your mortgage, by saving you almost 5 years of mortgage payments.
Remember that these options are available to you each and every year that you have your mortgage.
If becoming mortgage-free is your goal, consider making a prepayment on your mortgage and watch the years disappear!
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