How to Make the Most of Your Mortgage Payment
Our must-read primer on payments - plus, how to reduce your mortgage principal quicker!
I’m sure you know what a mortgage payment is. In the broad sense of the word, it’s a scheduled repayment plan for the mortgage you’ve obtained on a property. Now, let’s delve deeper into what a mortgage payment amount actually includes, how payments can vary, along with how you can use your mortgage payments to reduce your mortgage principal quicker. I will try to cover the important details, as well as some helpful tips when it comes to understanding your mortgage payment.
What is included in your mortgage payment
Your mortgage payment is comprised of two main parts: principal and interest. Principal is the original mortgage amount you borrowed, while interest is the cost of borrowing those funds. The only exception to this norm is interest-only payments that some mortgage products feature, such as a Home Equity Line of Credit. What portion of your monthly payment amount goes towards principal, and what amount goes towards interest, is determined by your interest rate type.
If you choose a fixed rate term, your mortgage payment is fixed and the percentage of your mortgage payment that goes towards interest and principal changes as the principal balance, is reduced. Your mortgage professional can create an amortization scenario to show you how the percentages change throughout the length of your fixed term. With a lower amortization comes a larger mortgage payment, which equates to more of your payment going towards principal, resulting in your mortgage balance reducing faster.
With a variable rate mortgage term, the payment amount can fluctuate with the same percentage going to principal and interest. This type of product can be tricky too because there is also some lending institutions that offer a variable rate term with fixed payments, while the percentage of payment that goes towards interest and principal changes. Both payment types are connected to your lenders Prime Rate and payment details change when the Prime Rate changes. As a rule of thumb, it can be noted that the interest portion of the mortgage is always covered first, with the remainder of the payment going towards principal reduction. Variable rates are especially appealing right now due to the low interest rates offered which come with the possibility of more of a mortgage balance reduction.
As some lenders offer the option of paying your property taxes with your mortgage, your mortgage payment could also potentially include a property tax portion. The lender will collect an additional tax payment portion from you with every regular mortgage payment, with the tax amount being placed in a separate account until your property taxes are due for the year.
Most mortgages default to monthly payments, though there are actually a few ways you can repay your mortgage;
Monthly: Due once per month, usually defaults to the 1st of the month or 30 days after your closing date. Some lenders will allow you to specify a different day of the month for your payment to come out each month.
Semi-monthly: Due on the 1st & 15th of every month. Not all lenders offer this option so double check in order to confirm it’s available to you.
Bi-weekly: Due every 14 days, or 26 times per year. If you choose this payment frequency, your first payment date will likely default to 14 days after your mortgage has closed. If you have a different date in mind, advise your mortgage professional. With this option, you can also choose between regular or accelerated payments. Accelerated payments are higher and directs a larger portion towards your principal thereby paying down your mortgage faster. Let the lender know which one you would like.
Weekly: Is once a week, usually a specific day every week, like every Friday. This frequency is usually also available in regular or accelerated options too.
Regardless of the payment frequency you select, ensure you inquire about what day your “interest adjustment date” is going to be on as it could result in an additional one-time out of pocket closing cost to you.
You can put your mortgage payment to work for you by utilizing your pre-payment privileges to reduce your mortgage principal faster. The easiest way is to go with bi-weekly accelerated payments, though if you really want to ramp up the repayment, take a look at the two most common solutions below:
Increase your payment amount
Most lenders allow you to increase your mortgage payment amount by 15-20% each year with no penalty due. Any amount above your minimum payment goes directly towards your mortgage principal which will reduce it quicker, resulting in less interest charged over the life of your mortgage. Your mortgage commitment will detail the pre-payment privileges your lender offers. Also note: Once you increase your mortgage payment, you can usually go back down to the minimum amount with a quick call to your lender's customer service centre or by visiting your home branch. There could be a cost for this, but each lender is different.
Lump sum payments
If you don’t want to commit to a payment increase, then lump sum payments are for you when you have extra cash. Most lenders allow up to 15-20% lump sum payment throughout each year. Depending on the lender, that’s 15-20% of your original mortgage amount or last renewed balance.
Your mortgage payment is more than just a way to repay your mortgage as it can also be one the biggest budget busters you have! Understanding how you can use it to your advantage is the key between those two. Once the mortgage qualifying is done, take the time to design a mortgage payment plan that is both affordable and puts you in a favourable financial position. Include your financial planner in the discussion to ensure you’re getting a well-rounded approach.
by Mortgage Girl
Mortgage Girl offers the best mortgage solutions, rates and all the different options you can have. Run by Jackie Woodward, the "original Mortgage Girl". Licensed under TMG The Mortgage Group