The mortgage you contract on your house can rapidly turn in making you feel like the prisoner of your own prison! The house of your dream could rapidly turn in the house of your nightmares if you lose your main source of income and don’t have any emergency savings. More than that, a big mortgage can seriously ruin your chances of ever retiring at an early age. But don’t worry, here are some tips on how to sleep better at night and refund your mortgage faster!
Tip #1 Sell the damn castle!!!
If you’re fortunate, the market value of your house should be bigger than your mortgage outstanding balance. So, if the payments are too big, why don’t you just sell the damn house?
You’re just sleeping there and listening to TV quite a bit. I know it’s a beautiful house but aren’t you tired of working like crazy and still have only 20$ left in your pocket after paying the mortgage? Seriously, many people buy houses like if they were millionaires! But then it’s at the price that they might never be able to retire early.
I know, you are going to tell me that you could sell the house when you’re going yo retire and live with the cash. Okay, I’m fine with that. But where are you going to live? In a trailer park? Seriously? You’re not even able to do it now. Why in hell would you want to finish your life there after passing 30 years in your mansion?
A single family dwelling house is not an investment. It’s a luxury spending. And if you amortize your mortgage on 30 years, you might end up paying your house two times what you bought it for. And, this does not account for property taxes and repairs. So where’s the deal? You think you’re going to sell 50 times what you paid for thirty years from now??? No! Chances are you won’t in most regions of america! So buy a house that corresponds to your real needs. Clear the mortgage fast and then buy bigger if it is truly your dream. This might be a smartest way of doing things. At least you’re going to have a reasonable mortgage and give a huge down payment.
Tip #2 Don’t pass your life in prison!
Okay, I know. You don’t want to sell but you still want to pay your mortgage faster. A mortgage is almost like a prison penalty. So please, restrain yourself from taking a long amortization. Try to keep it short! But let yourself breath.
After all, being debt free is already being rich. Imagine if you would have any debts to pay! You could quit your full-time job and take only a part-time job in another field that you might like more. Or, you could ask your boss for a salary free 3 months vacation to realize your dream of seeing Europe!
I think that 25 years should be the maximal amortization to get. Fifteen or twenty years is even better. By shortening the amortization, you’re also decreasing by a meaningful amount the interest you’re going to give to those rich banks.
For example, if you have a 300,000$ mortgage balance and decide to pay it on 30 years. It would cost you, at a 5% fix rate, 1601.08$/month or 576,388.80$ in total. But, if you put it on 25 years, it’s going to cost you 1744,82$/month or 523446$! This would make you save 52942.80$!!! That’s a huge amount!
Tip #3 Press on the accelerator pedal!!!
Pay your mortgage on an accelerated schedule and pay weekly or bi-weekly. Compounded interest is incredibly efficient at making you rich. But in the case of your mortgage, it’s not you who’s getting rich… So by paying weekly, you’ll save a bunch again!
To illustrate my purposes, let’s take the same 300000$ mortgage balance at a 5% fix rate for 25 years. By paying weekly on an accelerated schedule, your payment would be 436,32$/week and you would be able to refund your entire mortgage in 21 years 4 months, saving 37971.99$ in interests!
Tip #4 Double-up!!!
If you can afford it, find a lender who authorize you to make extra-payments every weeks. Some financial institutions even let you double your payment every week. This tool is very powerful because this money goes 100% in refunding the capital. No part goes to interest payment.
You can reduce drastically your amortization by giving even 100$ extra per month.
Let’s see the impact in our example. Let say you are paying monthly and you decide to give an extra 100$ per month every month for the length of your entire amortization. Here’s the result : You would end up paying in 22 years 5 months and save 25619.96$ in interests!
Tip #5 It’s your mortgage anniversary – offer a nice gift!
Every year, most financial institutions in Canada let us refund up to 15% of our original mortgage balance.
If you have received a bonus at work, it could be a nice gift to offer yourself! These lump sums directly reduce the capital you owe. They can have a great impact over the years.
Let’s take our 25 years, 300000$ mortgage refunded by a monthly payment at a 5% rate. If you would give an extra 3000$ every year on your mortgage (or 1% of the original outstanding balance), you would be able to pay off that mortgage in 19,5 years and save 56453.03$!
Tip #6 Why only one gift when you can give two?
Every year at the anniversary date, many lenders let you also increase your monthly normal payment by 10%. This also means that you could now double that new base amount every week. If you increase it by 10% every year, you’re going to refund your mortgage so fast you won’t believe it!
Tip #7 Your house is not an ATM
Even if many banks have tried to make you believe that you are sleeping on a pile of cash that you could use to pay off your personal debts or renovate your mansion, it might not be a good idea!
If you refinance your house to pay personal debts, not only are you going to pay many times your trip to the Bahamas that you had purchased on your credit card, but you’ll also reset all the hard work you did in paying off your mortgage! So if you can avoid refinancing, most of the time you should.
Your mortgage broker is going to tease you with a lower monthly payment but don’t forget that this reduction is mostly due to the fact that he’s going to amortize your credit card balance on 25 years… For sure 5000$ on a 25 years amortization makes for a smaller monthly payment. But make your own calculation of the total interests paid to make sure it’s really worth it. There are other ways to pay off your personal debts, like the snowball technique. And best of all, stop adding to them! That’s the first and best thing to do!
Tip #8 Negotiate! Negotiate! Negotiate!
Not all mortgages are equal! Negotiate or renegotiate your mortgage rate could have a huge impact on your ability to refund your mortgage fast!
While the rates are low, it might be a good idea to secure a low rate for a couple of years! The difference between a 3% rate and a 5% rate on a 300000$ mortgage is enormous. It’s 6000$ less per year in interests to pay or 500$ per months!
Tip #9 Stay with mom and dad for an extra year or two if you can!
Again, if possible, avoid buying a house with only 5% down… By giving a bigger cash down, you’ll save a lot on interests. So, if you think you can handle living with your parents for another year or two, that might be the best thing to do!
All of these tips are interesting. Some more than others. It might be very difficult to apply all of them at the same time. So, the most important one might be to buy a house at a reasonable price compared to your real ability to refund the mortgage. Don’t let your dream become your nightmare!
And like the saying says :
Who has no debts is rich!
* I am not a financial planner. Please make your own due diligence and consult with you professional financial planner before taking any important financial decision.
Image courtesy of Simon Howden/ FreeDigitalPhotos.net