Of Prime Interest: Paying down your mortgage principal

Your payment consists of two main components—principal, the amount you have borrowed, and the interest, the cost of borrowing that amount.

  • Jan. 27, 2016 6:00 a.m.

We all know what a mortgage payment is, not as familiar to many of us are ways to reduce the principal amount of your mortgage quicker.

Your payment consists of two main components—principal, the amount you have borrowed, and the interest, the cost of borrowing that amount.

The exception to this is an interest-only payment associated with a line of credit mortgage.

The amortization period (number of years to fully pay off mortgage) defines your payment. If you opt for a shorter amortization period, your payment will be higher with a larger amount going to principal. If you opt for a longer amortization, less will be applied to the principal with each payment.

If you have a variable rate mortgage your rate is connected to the prime rate and payments can change if there is a change to the prime rate. T

Typically, the interest portion of a variable rate mortgage is covered first with the remainder of the payment going to reduce your principal. Some lenders offer the option of paying your property taxes with your mortgage payment.

Their are several options for payment frequency. You can opt for a monthly payment which is due once a month. There is also an option for a semi-monthly payment due on the 1st and 15th of each month.

Or in the case of the bi-weekly option, payments are taken every two weeks for 26 payments per year. This is typical to making one extra payment per year and will reduce your mortgage balance quicker.

You can also opt for a weekly payment which like the bi-weekly payment has the advantage of paying down your mortgage quicker. The weekly payment is advantageous to the bi-weekly payment in reducing your balance quicker, however, not by a lot.

Most individuals opt for bi-weekly to coincide with a pay period. At the onset of taking out your mortgage you can choose exactly what day you would like your payment to commence.

This may result in an typically small interest adjustment payment —a one time interest charge to adjust your payment to the date you require. Your mortgage in most cases will come with pre-payment options.

Typical prepayment amounts are 15 to 20 per cent each year with no penalty and this amount depends on the lender your mortgage is with. This prepayment option will allow you to increase your mortgage payment by 15 to 20 per cent.

Any amount you prepay will go directly to the principal and thus reduce your mortgage balance as there will be less interest charged over the life of your mortgage.

If you choose to increase your payments and later go back to the original payment schedule, that option is usually available to you.

You also have the option of making a lump sum payment once per year. Again, the amount is typically 15 to 20 per cent of your original mortgage once per year again the amount depending on the terms the lender offers. Your mortgage payment is how your repay your mortgage.

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