Today you can get 25 or 35 year mortgages. Some folks choose a longer amortizaton period to manage payments, but sometimes people have a small mortgage compared to their williness or ability to pay it down and don't realize they can shorter the amortization period on their mortgage to save themselves significant amounts of money.
This tip can be a bit more painful in the wallet, but it can also have dramatic effects on how much money you save in interest and payments. By reducing your amortization period by just 5 years you can save thousands of dollars.
You can instruct your bank to do this on anniversary dates or when your current term expires. Some institutions will allow you to change this at any time but may charge a penalty for doing so. Some banks will offer it as an incentive to attract new business.
Based on a $100,000 mortgage at 6.00% interest for a 5-year term amortized over 25 years.
Your montly payment would be $639.81.
You would pay $28,225.07 in interest over the first 5 years.
You would pay $10,163.50 in principle over the same 5 years.
Implementing a Shorter Amortization Period:
Based upon the same $100,000 at 6.00% interest for a 5-year term amortized over 20 years.
Your monthly payment would be $712.19
Your total interest paid in 5 years amortized over 20 years would be $27,527.47.
You would have paid a total of $15,203.93 in principle over the first 5 years.
What You Will Save:
Once again you save $697.60 in interest and save 5 years of payments.
You also pay an additional $5,040.43 in principle over 5 years.
This method could cost you $72.38 more each month, but look at the savings. Could you spare $72.38 extra to save you that much money and be debt free on your home 5 years sooner?
Courtesy of Daryl Marsden, VERICO Canada Mortgage Direct
p.s. If your mortgage is higher than this example and the 5 year adjustment would be too much, then consider just rounding up your payments by whatever is comfortable to you. For example, round up a biweekly payment of $532.99 to $550.00 or even $580.00. Small changes can make a big difference over the life of a mortgage.