How To Dispose Of Your Mortgage Debt

Majority of the people are of the impression that acquiring a real estate is the safest, secure and risk-free investment as compared to putting one's money in stocks or mutual funds. However, it is indeed paradoxical that people usually buy houses with only 5 per cent of their own money, while the remaining 95 per cent comes from debts. And this makes buying real estate one of the most advantageous ventures that you can think of. In actual fact, now you can even obtain 100 per cent financing from lending firms, such as Exceed Mortgage, and many other mortgage brokers. If you take a look at the prevalent situation in the United States, you will be surprised to note that one can actually have a loan of as much as 110 per cent of the value of the real estate they are acquiring! In other words, this denotes that some one else is paying you to buy your house.

All said and done, a debt is after all a financial liability and any debt that does not provide tax-deductible benefits on the interest payments is really awful. And this is precisely the situation with the majority of the residential mortgages, which remains like a burden on your shoulders until you have cleared it off. Hence, always remember the fundamental rule - "Pay off your mortgage as early as you can". The primary objective of every home buyer ought to be obtaining a debt-free home and, therefore, there cannot be any superior fiscal plan than developing a stratagem to achieve this goal.

Nevertheless, if you still do not possess a home at present, you should acquire one now. Considering the prevailing interest rates on residential mortgages, chances are that you may perhaps own a home with the same amount of money or even less that you are paying as rent every month for the apartment where you are living currently. As long as you do not exceed your present housing budget, there is nothing wrong in purchasing a home with the least amount of down payment. It has been seen that many young people often get into trouble after buying a house, as after having spent thousands of dollars in cash and debt in acquiring a house, the continue to put every dollar they earn during the next ten years or so in upgrading it. So, never commit this common mistake when you buy a home. Remember that in a somewhat deflationary global scenario with an aging populace, real estate investment will no longer remain the gold mine that it has been during the past. In addition, you will also be requiring money each month to acquire financial assets and provide for your Registered Retirement Saving Plan (RRSP).

In case you already have a home and it is free of mortgage, it is an excellent time now to pull your stake in the house out.

On the other hand, if you presently possess a home that has a mortgage on it, you need to insistently decrease the loan amount and increase your equity in that particular real estate. Adopting such an approach will greatly enhance the number of fiscal alternatives in your life. Below, we present you with a number of plans to get rid of your mortgage loan and help you save a great deal of money in terms of interest payments. Following any or all of these approaches will enable you to accomplish the goal to own a debt-free home.

Make forestallments
You will find that once a year, the majority of the lenders will permit you to make a lump sum down payment of the initial mortgage amount that may usually be around 10 per cent to 15 per cent of the loan amount. When you make this pre-payment, it goes to decrease the principal loan amount reducing your financial liability. In other words, this means that you are paying off the mortgage sooner than the period agreed in the mortgage contract.
Enhance payments
Another strategy that you may use to get rid of your mortgage quickly is to augment the amount of money you are paying every month. There are several lenders who will permit you to increase your monthly payments two-fold and this additional payment will go to reduce the principal loan amount. If you continue in this manner, you will be able to eliminate your mortgage loan in less than half the period mentioned in the mortgage agreement.
Cut down the amortization
Generally, mortgages are amortized (a French term denoting 'killed off') in as many as 25 years. In this situation, the lender usually obtains the maximum interest on the loan in the initial years of the mortgage - usually the first 10 years, when the greater part of the monthly payments made by you is the interest. On the other hand, during the final years of the mortgage, the maximum portion of you monthly payments goes to reduce the principal loan amount. When you curtail the amortization, you will be required to make a higher payment every month, but eventually saving a lot of money in terms of interest payment. This is because most part of your additional monthly payment will again go to reduce the principal loan amount.
Top up payments
There are a number of lenders who will permit you to pay additional amounts against the principal according to your convenience. This kind of additional payments made periodically is known as top up payments, as they are made in addition to the regular monthly payments. Otherwise stated, your usual monthly payment of $1,412 may be increased to a round figure of around $1,500.
Make weekly payments
Most lenders never insist that you should make monthly mortgage payments. In effect, when you step up your mortgage payments, you not only save thousands of dollars in terms of interest payment, but are also able to clear off your debt in a fraction of the time agreed in the mortgage contract. Thus, instead of making monthly payments, you may choose to pay bimonthly to facilitate early clearance of the loan. However, the best approach is to make weekly mortgage payments, as this will enable you to get rid of you debt sooner and realize the dream of owning a debt-free home earlier.
If you are wondering how to change your mortgage payment system from monthly to bimonthly or weekly, there is no need to be concerned. All you need to do is take your usual monthly mortgage payment and split it in four equal parts. Then pay each part every week and this will enable you to lessen the reimbursement time by one-fourth. Frankly speaking, all this seems to be a small piece of a mortgage magic. Now, you must be wondering why this approach works so excellently. The answer to this is simple. As many months have more than four weeks, precisely speaking months with 31 days will usually have five weeks each, when you are making weekly mortgage payments, you are actually paying an additional installment in some months. In other words, as per this plan, you are eventually making an additional monthly payment every year. This, in turn, accelerates your mortgage repayment remarkably.

In addition, when you make the additional mortgage payment in the initial phase of the loan, you are actually speeding up the decline in the principal amount. As the principal amount will now be reduced faster than in the case of monthly mortgage payments, even the compounding result of the interest is also lessened. It needs to be borne in mind that the initial mortgage payments are approximately all interest, therefore, when you make payments more often, the small amount of principal being repaid is remarkably enhanced, lowering the interest charges on the principal amount in future.

However, here is a piece of advice. Be very cautious while adopting this strategy to get rid of your mortgage, for not all mortgages that may be paid weekly is similar. The weekly mortgage payments that help you to repay your loan much faster are equal to one-fourth of a monthly payment made every week. Contrary to this, there are a number of lenders who will offer you weekly mortgages that correspond to the entire year mortgage payment depending on 12 monthly payments. This is computed by dividing the total annual mortgage payment 52 (the number of weeks in a year) and, hence, such a weekly mortgage payment does not help you to clear off your debt sooner. Therefore, do not be hoodwinked by this kind of computing, as this holds no benefit whatsoever for you. However, the lender is at an advantage here, as he or she receives the same amount of annual mortgage payment and more often.

It is important to bear in mind that the prevailing mortgage rates are indeed a good deal. As the lenders continue their fight for the market share, borrowers are at an advantage since many lenders are now offering some really good deals. Now, if you are really looking for a home mortgage, look for rates that are most favorable for you, obtain a variable rate, below-prime mortgage product, attached with it even in case of an increase in the rates and make use of the mortgage-busting strategies discussed above - making lump sum payments or adopting a weekly repayment schedule - with a view to get rid of your debt at the earliest and own a debt-free home.

Remember, the best mortgage is always the one that is dead!

Additional guidelines and plans

Having done the requisite research and several rounds of shopping, it is expected that you will preferably arrange a variable rate, below prime mortgage with the facility of making weekly repayments. However, even before you begin to shop for your new home, you need to do something important and, that is obtain a mortgage pre-approval.

Presently, when the real estate market is booming, it is all the more important than ever before to be make out the precise amount of money that you are actually eligible to take as loan to facilitate the quick action necessary to acquire the home of you choice. In fact, you are able to become pre-approved quickly and without any difficulty by visiting any branch of a bank or by contacting a bank online. The benefits of doing this are noteworthy. Here is a brief discussion on the topic.

  • When you visit or contact any branch of a bank, you will be able to find out the exact amount of money you are eligible to borrow and, hence, the amount of money you will be able to spend to acquire a new house. Now, if you add the amount of cash you have with you to make the down payment with the amount of mortgage you can secure, you will get a clear picture regarding the upper price range of the house that you are able to afford.
  • The next thing to do is lock in a rate. In fact the lender will offer you an assurance that on the very day you become pre-approved, your mortgage interest rate will be fixed and it will not go up for a specific period of time, say for three months, even if the interest rates rise in the market during this period. At the same time, you will receive a guarantee that in case the interest rates in the market fall below the interest rates fixed by you during those three months, the banks will pass on the reduced interest rates to you. This is indeed a win-win situation for the borrower, who seldom gets such favourable deals in his or her life.
  • When you are pre-approved you enjoy the benefit of getting rid of the otherwise mandatory clause on financing when you submit a purchase offer to the vendor. When the market is booming and hot, pre-approval not only makes your position stronger, but also provides you with an edge when there is a competition from other potential buyers for the real estate property you have decided to acquire. In reality, irrespective of the market conditions, when you are pre-approved it not only gives you the advantage of eliminating the financing clause, but also puts you in a better standing from where you are able to bargain on other aspects like the price and the closing.
  • When you are pre-approved, it helps you to demonstrate as well as convince your real estate agent that you are really keen and serious about buying a new home. At the same time, with the pre-approval, you may also stimulate your real estate to allocate more of his or her time to fulfill your requirements.
    You should know that getting pre-approved does not cost you anything and there is nothing that will prevent you from going through the procedure at several lenders. In fact, going through the process at different lenders will only help you to obtain the deal that is most favorable for your needs and desire. You should also be aware of the fact that even when you are pre-approved with any lender, there is no obligation whatsoever on your part to actually get through with a mortgage also. Seeking a pre-approval has another advantage and, that is, while you are going through the procedure, you will come to know the exact features and facilities that the different lenders are willing to offer you.

The amount of loan you can have to buy a home

Since residential real estate is now being regarded an extremely good asset to provide a loan against, you will find that the banks will really be willing to offer you amazing sums of cash when you apply for a loan with them. Nevertheless, there are also some cutoff points and you need to be conscious of them. Here is a brief discussion on some these limits.

  • No conventional mortgage will offer you more than 80 per cent of the assessed value of the property you are looking forward to acquire. In order to avail the loan amount under any conventional mortgage, you are required to possess the remaining 20 per cent of the price of the property as well as well as the amount required cover the closing costs.
  • Well, it is possible for you to secure as much as 95 per cent of the purchase price of a property, while you provide the remaining five per cent in cash. However, such a mortgage that offers more than 75 per cent of the appraised value of a property is known as a 'high ratio' mortgage and in this case you need to insure the mortgage for stability. And ensuring a mortgage will require further money. The two firms that offer such mortgage insurances in Canada are Canada Mortgage and Housing Corporation (CMHC) and GE Capital. Usually, the lender arranges for this type of insurance on behalf of the borrower. It may be mentioned here that most borrowers unwittingly, but out of obligation to the lender, include the insurance premium in the mortgage amount borrowed by them. Be cautious and try to avoid committing similar mistakes.
  • It is important to remember that the amount of money that you are able to secure as a mortgage loan largely depends on your aptitude to refund it to the lender along with the interest accrued on it. Therefore, the lender or bank will ask you to provide them with a verification of your income or earnings. As per the universal rule, you will not be allowed to use more than 30 per cent of your family's gross monthly income to make monthly mortgage payments and the taxes on the real estate property owned by you.
  • It is interesting to note that for long, people who are self-employed, owner-operators, entrepreneurs as well as sales persons working on commission basis have faced deliberate prejudice against them by the Canadian lenders, including the banks, whenever they have tried to secure a mortgage. The people mentioned above are the same who launch their independent companies, create jobs, provide employments opportunities to others, pay hefty fees to the banks and help the country's economy develop. However, the irony is that when these same people approach a bank for a mortgage, they are treated as second-rate citizens and considered to be enormous risks to be offered any loan to purchase a house. Therefore, if you are one among these people, who are otherwise regarded as the country's economic heroes, be ready to face various embarrassments and disgrace if you try to get a mortgage for acquiring a home. When you apply for a mortgage, you will be required to provide the lender with your tax return for the previous year, write out a net worth statement and also endure immensely heightened inspection or security. The irony of the entire process is that when any employee of any entrepreneur is able to walk out merrily with a mortgage only providing an income certificate signed by the same entrepreneur. What is even more paradoxical is the fact majority of the owner-operators of small business enterprises usually have much more job security compared to what the bank loan officials they cope with have.

Now, here is the concluding message on mortgage stratagem for borrowers who were convinced to accept long-term fixed rate mortgages and who are now observing the proceedings with envy as the interest rates declined. As discussed earlier, you are usually much more comfortable when you obtain a short-term or variable rate mortgage. Nevertheless, if you find yourself in a situation where you are trapped by an unfavourable mortgage plan, here are a few things that you can do to ease your miseries and problems.

Merge and expand
When we say you need to merge and expand your mortgage this actually denotes continuing your existing mortgage into a new one with a longer tenure. The interest on the new mortgage will be a distributed combination of the old interest rate on the residual years of your term and a new, lower interest rate on the years that you are renewing the mortgage for. Although there may be a number of lenders who would ask for a monetary fine for allowing you to do this, you should be able enough to convince them your case and avoid paying the penalty.
Break the mortgage
Although you may come out of a long-term fixed rate mortgage to be able to enjoy the benefits of lower interest rates prevailing in the market now, you need to pay additionally for being allowed to undertake such a step. In such a situation, you may expect to pay a fine that is equivalent to which ever is greater - three monthly mortgage payments or the interest rate differential. In this case, the interest rate differential will be computed as the sum of interest between the present mortgage rate and the current one on the amount of the loan principal over the amount of time left on your old mortgage tenure. When you have worked out the penalty you need to pay to get out of the long-term fixed rate interest, you will probably comprehend that there is no benefit in doing so, if not you are of the view that the mortgage rates that are small now, will soar higher in the future.
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