# Mortgage paydown + financial planning questions



## MoneyGal (Apr 24, 2009)

Question: let's say you've reduced a mortgage substantially over the past few years and it is now up for renewal. The new amount you need to mortgage is much smaller than the existing mortgage.

Do you: 

*Option1: Keep a "traditional" amortization *of, say, 20 years so your payments are low - but double-up payments so the expected payoff date is much closer than the amortization?

Or do you:

*Option 2: Choose a short amortization *period (say, 10 years), with payments that are similar to the payments you are making now?

I know that choosing Option 1 gives you "wiggle room" in case (for whatever reason) you are "not able" to make the payments you'd make in Option 2. 

But let's say that you've been making payments at or above the level of the Option 2 payments for pretty much your entire adult life...

WWCMFD? (What Would CMFers Do?)


----------



## jamesbe (May 8, 2010)

Depends on your financial discipline.

I pick Option 1 and pay down because I'm disciplined. Gives me more options if something does happen.


----------



## bgc_fan (Apr 5, 2009)

Unfortunately, I'm not too disciplined so I pick option 2. As the funds are taken out of my bank directly, I do not notice the loss. However, I fear that even if I have intentions on doing option 1 (extra payments), I will most likely not double-up and would end up spending the "extra" money.

I guess it depends on discipline and if you need the flexibility.


----------



## DavidJD (Sep 27, 2009)

I keep it at Option 1. Nobody can see the future and what is coming. Kids. Cabins. Moving. Travel. I presume the IRD or payout would be similar?

You could also do MORE than option 1 describes, Lumpsums AND double up, and MAX payments, and go bi-weekly...and then ease off if other things come along.


----------



## MoneyGal (Apr 24, 2009)

DavidJD said:


> You could also do MORE than option 1 describes, Lumpsums AND double up, and MAX payments, and go bi-weekly...and then ease off if other things come along.


(Mortgage is renewing; no IRD)

I thought that borrowers were limited to 20% of the outstanding balance - I don't know what all the different mortgage variables and varieties are, though. Maybe someone should school me - can you get a fully open mortgage with no limits on prepayment...at the same kind of rate you'd get for a variable mortgage?


----------



## Plugging Along (Jan 3, 2011)

Great question... we were faced a similar situation for our mortgage.

We determined we would pay off the mortgage in 3-4 years based on an accelerated schedule and max. pre payements. We amortized over 10 (down from 17 we had left) years which be the min payments. Then we immediately doubled our payments, to what we actually wanted to pay, which would put us at 5 years left. 

I found there were a couple of little glitches such as on the last mortgage term we could not actually double up our payments to to full amount because it would take us down lower than the min 5 year amortization, but was able to make up for it with our prepayments.

So essential we amortized the the shortest duration based on the min payments we wanted to make, but doubled that to the max for the additional payments. Clear as mud?


----------



## Plugging Along (Jan 3, 2011)

MoneyGal said:


> (Mortgage is renewing; no IRD)
> 
> I thought that borrowers were limited to 20% of the outstanding balance - I don't know what all the different mortgage variables and varieties are, though. Maybe someone should school me - can you get a fully open mortgage with no limits on prepayment...at the same kind of rate you'd get for a variable mortgage?



This is gererally the type of mortgage I used to have was a fully open variable. i was not limited to the number of prepayments, and can pay off the whole amount at any time. 

We had to move the a closed variable mortage (the scenario we described) because the rate was much better, but then we were limited to 20% of the principle and double the payments.


----------



## brad (May 22, 2009)

MoneyGal said:


> (Mortgage is renewing; no IRD)
> 
> I thought that borrowers were limited to 20% of the outstanding balance - I don't know what all the different mortgage variables and varieties are, though. Maybe someone should school me - can you get a fully open mortgage with no limits on prepayment...at the same kind of rate you'd get for a variable mortgage?


ING allows you to pay up to 25% of the original mortgage amount each year, so theoretically you could pay off a 20-year mortgage in 4 years with no penalty. That applies to either fixed or variable rate mortgages.


----------



## MoneyGal (Apr 24, 2009)

Thanks, PA! I should really know all this. Your posts remind me that we moved to a closed variable because of the rates. The scenario you described in post 6 sounds perfect. :encouragement:


----------



## Cal (Jun 17, 2009)

I would probably take option 2, yet would still find a way to put some extra $ down.


----------



## Oldroe (Sep 18, 2009)

I always had TD mortgage. You can move your amortization period anytime. So I always signed a 25 year mortgage and then moved it to 15 or 10 even 11. I would phone the bank and say $500/week and they would tell me 12 years.

Then we had seasonal over time so I would drop another $100 per week maybe moving it to 9 year.

Then we might go on strike phone them back up and make it 25 year , strike settled drop it back down.

Get my income tax drop it more.


----------



## Sampson (Apr 3, 2009)

Option 1 - we have discipline and make fairly large top up payments annually, but want flexibility.

We hope to only have to ever make this decision once.


----------



## crazyjackcsa (Aug 8, 2010)

I'm with Oldroe. Traditionally you can move around the amortization without a penalty. If you can't, it's easier to take option 1.


----------



## My Own Advisor (Sep 24, 2012)

I'd go option # 1 and when I had more money, simply make more lump sum payments.


----------



## Maybe Later (Feb 19, 2011)

I would probably do as PA, but make sure my penalty for breaking the mortgage was something like three months interest (most variable rates) so I could opt to pay it out any any point in time with little overall impact.


----------



## andrewf (Mar 1, 2010)

You can use 1 year fixed rate mortgages to approximate variable rate, with annual option to repay as much as you like.


----------



## Four Pillars (Apr 5, 2009)

When I was in that situation, I picked an amortization that gave me a monthly payment I was comfortable with, but was more than had I chosen a 20 year amortization. So I could make extra payments or not. Either way it gets paid off in a reasonable amount of time.

One thing I would suggest is to do shorter terms ie just lock in for 1 or 2 years. It's a bit more hassle, but that way you can get around any maximum extra payment amounts by just paying off a lump sum between mortgage periods. Even if the monthly payment you end up with ends up being 'too high' or 'too low', it won't really matter much since you can reset it at renewal time.

And I now see that Andrew suggested the exact same thing.


----------



## MoneyGal (Apr 24, 2009)

Now kiss. 

(j/k)

Seriously, thanks for all the advice.


----------



## Four Pillars (Apr 5, 2009)

MoneyGal said:


> Now kiss.


Ewww. [Not that there is anything wrong with that]


----------



## MoneyGal (Apr 24, 2009)

Had to get you back for that BJ comment.


----------



## Four Pillars (Apr 5, 2009)

Haha - I guess we are even now.


----------



## CanadianCapitalist (Mar 31, 2009)

Ewww. Get a room guys


----------

