Thursday, February 19, 2009

6 Tips to Pay off Your Mortgage Debt

Practical Advise to Pay off your Mortgage Faster

Most homeowners would love nothing more than not to have that mortgage debit in your account every month. But trying to pay off your mortgage ahead of schedule is not something to be undertaken lightly. You must make sure you are financially secure, with no other significant debt, and have money in reserve for emergencies. Above all, IT will take discipline.

There are also compelling arguments for not paying off your mortgage ahead of schedule. If you are inclined to take some risks, you could invest the money instead. Your investment could conceivably earn enough money to offset the benefit of paying off the mortgage.

In your haste to be rid of your monthly mortgage burden, you cannot afford to mortgage your financial future. Make sure you will be able to finance your children's college education and your own retirement, Investigate the newest (TFSA) Tax Free Savings Account.

If you are in a debt-free financial position where you can pay off your mortgage more quickly without sacrificing other aspects of your life, there are a few ways to accomplish this. Naturally, you will have to consult your lender to see what you can and cannot do. Here are a few of the most used options.

1. Increase your payment schedule. Biweekly mortgage payments have become increasingly popular as a way to pay off a mortgage more quickly. OK OK... we all know that one. One extra payment a year.

2. Make lump sum payments. Depending on the terms of your mortgage agreement, you may be able to make lump-sum payments at specific times. For example, you could earmark your bonus cheque of $5,000 to pay off part of your mortgage. Let's approach this a touch differently. Let us suppose we open a credit line of $10,000, (pay it on the mortgage Day 1) that we then use to deposit our income/payroll cheques, then pay our regular bills. The goal here is to retire the entire credit line with a 12 month period and borrow an additional $10,000 again to pay against the mortgage. Most mortgages contain a 10 or 15% annual prepayment priviledge without penalty.

3. Shorten the time frame of your loan. You could elect to refinance and change your 30-year mortgage to a 15-year mortgage. Bear in mind, though, that your monthly payments will be considerably higher. Lets try this concept in smaller bites. With a mortgage at year 30 you just bought the house. On the Anniversary Date, shorten the mortgage from 29 to 28 years. By making modest adjustments over the next 15 years you will have retired your entire mortgage.

4. Increase your payments. If your financial situation has improved and you are making more money, you may be able to make higher payments or balloon payments. Most loans will allow you to increase your payments in this manner with certain restrictions.

5. Refinance at a lower interest rate, but pay the same amount each month. If you maintain a 30-year mortgage, but the interest rate drops from 6.25 percent to 5.00 percent, the money you were paying in interest can now go toward the principal. Should You Refinance Your Mortgage Loan? If you are approaching a renewal I recommend that you schedule an interview with a Personal Banking Representative in your home to discuss your options.

6. Use your RRSP-driven tax rebate religiously as a mortgage prepayment method. Even if you can only prepay annually, make sure these funds are set aside for that purpose. Many Canadians will borrow (at prime) to buy an RRSP to ensure the maximum rebate. When applied to the mortgage principal, this refund is a "gift that keeps on giving". Combining the refund with the tax-free interest earned on the RRSP over the subsequent years will quickly outpace the short-term interest costs of the RRSP loan.

I welcome your input if you have additional ideas to add to this plan of debt reduction. Add your ideas in the comments section.

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