Will I Be Able to Afford My Mortgage in Five Years?
As interest rates creep upward, first-time home buyers might wonder if getting into a mortgage is a good idea.
What if rates rise during my mortgage term, and how will I make the increased payments?
There is a smart way to avoid being faced with an inescapable increase in payments should you have to renew your mortgage at a higher interest rate – and that is to pay down as much of your mortgage principal as you can afford while interest rates are low.
The Mortgage Calculator Test
We used the CENTUM Payment Analyzer
to calculate monthly payments on a $300,000 mortgage. We chose a hypothetical five-year, fixed mortgage rate of 4.5 percent and a 25-year amortization period. (Shop around for the best mortgage; independent mortgage brokers can usually negotiate lower rates than advertised by lending institutions).*
The Payment Analyzer calculates the monthly payment on our $300,000 mortgage at $1,660.42, and includes a report of year-end balances for the life of our mortgage. At the end of year five, the estimated principal remaining on our mortgage is $263,389.08.
Monthly Vs. Bi-weekly Mortgage Payments
Now let’s say we choose to pay off the mortgage in accelerated bi-weekly installments. Using the same criteria, the calculator estimates these payments at $830.21 every two weeks. (This plan is well-suited to home buyers who are paid bi-weekly by their employers.)
At the end of the five-year term, our remaining principal is $253,987.53 – about $9,400 less than under the monthly payment plan. According to the report, we also pay off our mortgage in roughly 22 years as opposed to 25.
It Pays to Reduce Your Mortgage Principal
Despite mortgage rates going up slightly, your principal will continue to go down – how fast that happens depends on your loan terms and payment plan. The above shows how an accelerated payment plan can markedly affect the amount of principal you pay down in five years, which will reduce the total amount of interest you pay over the life of your amortization.
No matter if yours is a fixed or variable rate mortgage
, pay as often as you can comfortably afford and negotiate options that give you flexibility to pay down the mortgage faster. You will build equity in your home more quickly and be in a better position to negotiate payment terms if mortgage rates go up.
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*A calculator is not a substitute for consulting with a professional lender to determine your actual rates and payments.
Posted by CENTUM Canada
on July 27, 2010