Lump-Sum Payment
Using a Lump-Sum Payment to Reduce Amortization
In general, you can make a lump-sum payment all at once. This is different from smaller installment payments over a period of time. When it comes to mortgages, a lump sum is a large payment made in addition to your current monthly payments. This is done typically once a year if that often.
The major benefit here is that it counts directly against he principal of your loan. That decreases the amount of interest that you will wind up paying and the amount of time that it takes to pay that off. This saves you a lot of money in the long-run.
Lump-Sum Payments and the Principal Mortgage Amount
These lump payments are applied directly to the principal of your loan. This means that you won’t be paying interest on that lump sum as you would your normal mortgage payment. These lump-sum contributions won’t lower your monthly payments unless you negotiate that, but it will lower the total loan amount.
Any extra money you have sitting around might benefit you to put towards a lump payment. That money can that you put in is converted into equity in your home. And in most cases, you can access that money at a later date if you need to.
There are lump-sum calculators that can show you how making that type of payment will impact your loan over time. There are also mortgage calculators that will factor those payments in and tell you how much shorter your amortization will be.
Saving Money with Lump Payments
Making a lump payment towards your mortgage in the idle of a term can save you a lot of money in interest payments over time. Take a look at the example in the chart below:
| Mortgage Amount: | $250,000 | ||
| Interest Rate: | 5% | ||
| Amortization: | 25 Yr | ||
| Payment Frequency: | Monthly | ||
| Lump Sum: | $0 | $5,000 | $10,000 |
| Interest Savings: | N/A | $11,022.30 | $21,348.72 |
| New Amortization: | N/A | 24 Yrs, 1 Mo | 23 Yrs, 2 Mo |
If you are a first-time home buyer looking for a new home or to refinance into a better product, there are many questions worth asking. One of those is whether or not lump-sum payments are available within the mortgage term you choose.
There are a number of different events that make a lump-sum payment possible. This includes:
- A raise or bonus at work
- An inheritance
- Maturity of an investment
- Dividends or returns on an investment
- Sale of a car, boat, or other asset
- Receipt of a policy payout
Mortgages Where A Lump-Sum Payment Aren’t Allowed
If you can’t make a lump-sum payment on your current mortgage term, examine the option to refinance carefully. IF breaking your current mortgage causes you to incur a penalty fee and your current rate is competitive, it might be worth it to just complete the term.
Even if this is the case, you may have ways to implement that surplus money into your overall financial strategy. For instance, you can invest in a term-investment that will mature when your mortgage comes up for renewal.
This grows your lump sum payment that you can make when it becomes possible to do so. You can also make a tax-efficient contribution to your Registered Retirement Savings Plan (RRSP). You can even invest in a home renovation that will improve the overall value of your property when you decide to sell.
The key here is to plan ahead and examine your budget. Know what you can afford to pay towards a lump-sum payment. Even a small change in spending habits can be all you need to get the money for a lump payment. That saves you in interest payments over time, too.
Call Super Brokers for More
If you need help determining whether or not a lump-sum payment is possible, call our team at Super Brokers. Our team is experienced and can help you find the best course of action for paying off your mortgage.