The Power of Prepayment Options
Michael Hallett • March 2, 2016
Do you have a Mortgage Action Plan (MAP)? If not, it's time to plan your road MAP to mortgage free living. Every lender provides options, but very few take advantage of them. These mortgage benefits are called PREPAYMENT OPTIONS. The 3 most common prepayment options are: adjust the frequency at which the payments are made (weekly, semi-monthly, bi-weekly, monthly and accelerated), increase the monthly payment amount (there is a maximum monthly percentage) and lump sum (or balloon, also a maximum percentage of the original mortgage balance) payment. Make sure you know how to utilize them to the fullest and what your maximum amounts are. Don't feel obligated to maximize the prepayment options but at the very least make extra payments, your retirement savings will thank you later.
Only 32% of all mortgage borrowers exercise their contractual right to make significant efforts to accelerate repayment, including taking one or more of the following actions in the past year:
- 16% have voluntarily increased their monthly payments.
- 15% have made a lump sum (balloon payment) contribution to their mortgage.
- 6% have adjust or increased their payment frequency.
Monthly Increase Payment
If choosing an accelerated bi-weekly repayment schedule does not work for your plan, then maybe you might be able to consider adding an extra principal payment to your regular monthly mortgage commitment. The graphic below illustrates how the principal amount is reduced when utilizing the monthly increase prepayment option. By adding $100 to your monthly mortgage you can save $10,729 in interest and reduce the life or the mortgage by 5.9 years.
Annual Lump Sum or Balloon Payment
The last prepayment option you can utilize to pay down your mortgage sooner is called Balloon payment. You are contractually allowed to pay up to make annual payments on the anniversary date. The graphic below shows a $1,000 balloon payment. An annual contribution of $1,000 will reduce your mortgage by 5.2 years and save you $9,719 in interest.
My Personal Scenario
You are likely asking yourself right now, so what does Michael's road MAP look like. Well, I'm happy to share that with you. My current lender allows me to increase my monthly payments by 15%, make a annual lump sum payment of 15% (of the original mortgage balance) and/or double up my contractual minimum monthly commitment. I have elected to exercise my contractual right to utilize the 15% monthly increase to the maximum. My monthly contractual payment is $2,074.98. By maximizing the 15% monthly increase my adjusted payment is $2,386.23 which is an extra $311.24 per month. If I had decided to only make the minimum monthly payments of $2,074.98 then the life of my mortgage would be 25 years remaining at the end of this current term (maturing July 2017). However, with the extra payment of $311.24 per month I've effectively reduced the life of my mortgage to (currently) 21 years 2 months, even less when it matures in 17 months. If I were to keep maintaining the same course of action as above for the entire life of the mortgage the revised amortization would be reduced from 30 years to 15 years 9 months saving me $114,827.94 in interest.
Why not join the 32%ers elite club?! The contribution can be minimal and usually unnoticeable on a day-to-day basis, the pay-off is years sooner though. The power of making extra payments is overwhelming. Ask me how to increase your equity position. Your bank account will thank me later.
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One of the most common questions, “how long does it take to get pre-qualified?” My response, “how fast can you provide the information I need.”
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