Hamilton Real Estate: The Want List vs. The Need List

Hamilton Real Estate: The Want List vs. The Need List: One of the biggest problems I encounter with buyer's is differentiating between a 'want' and a 'need'. Too often people...

The Fast Lane to Mortgage Freedom

(NC)—A low interest rate is often seen as the best way to save money on a mortgage and the quickest route to becoming mortgage-free.

But that's only one part of an effective strategy. Don't focus all your time and energy on rate comparisons. It is equally important to look for a mortgage with flexible terms, say specialists in this field.

The average Canadian homeowner will pay his or her mortgage off in 15 years, according to a recent RBC Home Ownership Poll. Less than half (42 per cent) of homeowners are taking advantage of options that allow them to shave years off their mortgage and save on interest costs.

Here are three tips to get you on your way to mortgage freedom:

1) Adopt a bi-weekly payment schedule

An accelerated bi-weekly payment is often the easiest adjustment that can help you save on mortgage interest - especially if you line it up with your paycheque. You end up making 24 bi-weekly payments a year versus 12 monthly payments resulting in interest cost savings as you pay down your principal faster.

2) Take advantage of prepayment privileges

A flexible mortgage may include features such as doubling up a payment or putting down a lump sum at the end of the year. These additional payments are applied directly to your mortgage principal and will reduce your amortization period. Consider putting a work bonus, tax refund or extra savings towards your mortgage balance.

3) Round up your payment

You can chip away at your mortgage without missing a beat by rounding-up your payment amount. Say your accelerated bi-weekly mortgage payment is $557. By rounding up your payment to $600 a month, you could put more than $1,000 per year extra towards principal and be mortgage-free faster.

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6 Months to a Better Budget

One of the challenges with proper budgeting is that it has to become habitual in order to be effective. You can survive without knowing how to budget if you manage to keep more money coming in rather than going out or have credit cards to cover the gap, but this won't last forever.

Emergency Fund

The crux of this six-month plan is the emergency fund. Ideally, everyone should have at least one or two months' wages sitting in a money market account for any unpleasant surprises. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. You will want to build your emergency fund as quickly as possible. The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it and, if possible, putting in whatever you can spare on top.

What's an Emergency?

You should only use the emergency money for true emergencies: like when you drive to work but your muffler stays at home. Covering regular purchases like clothes and food do not count, even if you used your credit card to buy them.

Downsize and Substitute

Now that you have a buffer between you and more high-interest debt, it is time to start the process of downsizing.  It’s odd that the natural solution to "not enough money" seems to be increasing income rather than decreasing spending, but this backwards approach is very familiar to debt counselors. The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest. This can be a process of substitution as much as elimination. For example, if you buy coffee from a fancy coffee shop every morning, you could just as easily purchase a coffee maker with a grinder and make your own, saving more money over the long term.

Focus on Rewards

Another trick that will help your budget come together faster is to focus on the rewards. A mixture of long- and short-term goals will help keep you motivated. This can be as simple as saving for a small luxury, or even something bigger like buying a car with cash. Watching these goals slowly but surely become a reality can be very satisfying and provide further motivation to work harder at your budget.

Find New Sources of Income

Why isn't this the first step? If you simply increase your income without a budget to handle the extra cash properly, the gains tend to slip through the cracks and vanish. Once you have your budget in place and have more money coming in than going out, you can start investing to create more income.

Now, it is possible that it will take you more than six months to get your budget balanced out as it all depends on your situation, including how much or what kind of debt you have. But, even if it does take you longer than six months to get your budget turned around, it is time well spent.        

          
(Source: Investopedia.com) 

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