Paying off a mortgage and getting rid of debt is an important financial goal for most Canadians. According to statistics by the Canadian Association of Accredited Mortgage Professionals, most Canadians want to accumulate wealth in order to pay off a mortgage as quickly as possible. However, sending off the last cheque to your mortgage lender is not the final step. A mortgage loan is a complex transaction, and fulfilling the terms of the loan accompanies additional payments as well. Plus, there are some important financial decisions waiting for those who become debt-free owners of their own homes. Here are some issues you should consider when paying off your mortgage.
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Pay Off Early?
First of all, you should figure out whether to pay off your mortgage early and when to do so. Paying off early has many benefits, such as owning your own home, having peace of mind without debt, obtaining financial freedom, and saving on interest costs. It's a decision that will introduce some certainty into your life. The home you live in is your biggest asset, and paying off early will allow you to build equity that you can use to cover other expenses. As Tino Brelak, a Toronto-based mortgage broker, informed us,
If someone has funds sitting in an account, it makes sense to pay off the mortgage instead. Mortgage payments are paid from after-tax funds, while keeping them invested generates income, which still has to be taxed.
Brelak adds that there are numerous factors that determine when it's smart to pay off a mortgage, such as tax brackets or whether the mortgage is against an investment property. With record-low interest rates, you might be earning a higher rate of return by investing than by paying off your loan. The opportunity cost in such cases is the main issue you should consider. On the other hand, if you pay off, you don’t have to worry whether or not you'll be able to keep up with mortgage costs in an unstable housing market.
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There are several options when it comes to how to pay off your mortgage faster without incurring mortgage penalties. First of all, you can increase the frequency of your payments. This will allow you to pay a bigger portion of the principal each year. Second, if you chose a closed mortgage, you may prepay up to 10 per cent of the borrowed sum at any time each 12 months. You can also make an additional mortgage payment equal or lower than your regular payment, or you can increase the amount of your payment.
Additional Payments and Financial Planning
The last payment on your mortgage is finally here. You might think that it’s just one more payment and you're nearly debt-free. This isn't entirely true, as there are a few more steps you have to take to own your home and clear your debt. Dan Wowk, owner of ZoomMortgage, located in Oakville, told us,
After the final mortgage payment, a homeowner will still need to pay a discharge fee. This fee depends on the lender, but it's typically $350. The reason for the fee is to remove the legal registration of the encumbrance from land titles. It’s not mandatory to discharge your mortgage (and pay the fee) immediately after paying off your mortgage, but you will eventually need to take care of it. You cannot sell, transfer title, or obtain a new mortgage until you have discharged your previous mortgage.
The bank will send a discharge of mortgage document to the registry office to declare that there is no longer a lien on your property. Your title will be clean. This means that if you sell, you will recognize all of your equity minus any costs of selling.
Another important document that you might need after paying off your mortgage is a mortgage statement. It's sent out to the consumer once or twice a year, and you can find the document online as well. A mortgage statement shows the mortgage balance, interest rate, monthly payments, and balance of the tax account if taxes are paid with the mortgage. It’s a good idea to have this statement handy in case you need to confirm any information about your mortgage.
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Plus, you should keep in mind that you will still have to pay property tax after paying off your mortgage. If you paid property tax with your mortgage, after you make last payment, you will have to contact the city and arrange payments for property tax on your own. Fire insurance will stay the same, as it has nothing to do with paying off the mortgage. Also, your mortgage insurance will expire when you pay off the loan. However, Edward Barr, a mortgage agent from Richmond Hill, suggested that you might consider taking life insurance with an agent. As he explained,
Mortgage insurance offered by banks is provided for the term of the mortgage. Let’s say you have a five-year term and you're 40 when you applied for the mortgage. In five years, your term will expire and you will have to apply again, but the cost of the insurance will be higher because you're 45 now.
Even though many people say that having peace of mind without worrying about monthly payments is crucial for them, you should keep in mind that you're in charge of your finances and you'll have to make some important financial decisions. Suddenly, you'll have more funds, and you might easily increase your spending habits. In order to avoid this tendency, you should start saving and create a plan.
Many mortgage brokers will recommend you get a secured line of credit against your property. A home equity line of credit offers many benefits, allowing you access to a variety of borrowing options using your largest asset — your house. With a home equity line of credit, you only apply once. This allows you to access your credit any time without having to reapply. The interest rate for a secured line of credit is lower than other unsecured credit products, particularly credit cards. So if you're planning to carry a balance, you might want to get a home equity line of credit. You can draw up as much as you want up to your credit limit, and you only pay interest on the amount you withdraw. This means that if you don't use your line of credit and your balance is zero, you won't pay any interest.