As Mortgage & Leasing Experts, we always seek for “the best mortgage” for our clients; the mortgage that not only provides the best interest rate, but also the one with the best terms and conditions.
With a fixed interest rate, closed term mortgage, you can’t pay off your mortgage before the end of the term without having to pay a penalty.
The pre-payments without penalty clause is one of the conditions that can save you considerable amount of money in the long run. This clause allows you to make payments of the principal of your loan, or increase the amount of your periodic payments (monthly, bi-monthly, etc.) without a penalty. Each lender has different programs for pre-payments, they usually vary from 10% to 25%, i.e., you can pay any amount within the approved percentage of the original value of your mortgage or increase your periodic payments once a year without paying a penalty.
Many people don’t take advantage of this clause because it is generally difficult to save the extra money to make additional payments.
We always tell our clients that the easiest way to take advantage of this benefit is what we call “The Java Factor”. This is something that is very easy to follow and can save you thousands of dollars on pay down your mortgage.
Usually everyone buy a cup of jo (coffee) or two during their work days. When we see the cost of a cup of coffee at Starbucks or any other establishment, we realize that maintaining this habit can be very costly.
Suppose that you spend at least $5 per day, 5 days a week in “coffee, donuts, chocolates, cigarettes etc.”, this would amount to approximately $108 per month; if you apply them to your monthly mortgage payments, the savings can be considerable.
In a $100,000 mortgage at a rate of 2.89% and 30 years amortization, you would reduce the total payment of your mortgage by 7 years 5 months with savings of $15,341 in interest. For this calculation, we considered that the interest rate did not change during the life of the mortgage.
This calculation would vary case by case but depending whether you have a pre-payment clause with your mortgage or not, it is important to emphasize that by making a small sacrifice you can have significant long-term savings.
So remember “The Java Factor” and go to work with a cup of coffee brewed at home.