Looking for the perfect mortgage? Lump sum payment options

In most circumstances, making mortgage payments puts more than enough strain on the family budget. Therefore, most people are more interested in longer-term mortgages (3 to 5 years) that allow for greater budget predictability. However, on the off chance that some extra money becomes available (a tax refund or estate settlement), many mortgagors often would like to pay off a portion of their mortgage. In response, lenders have introduced lump sum payment options for borrowers.

Most lenders will allow you to pay a lump sum, or to make a "prepayment" as it is known in the mortgage industry, of between 10 and 15 per cent of the value of your mortgage each year. While this may not sound like much of a perk, prepayment options can play a valuable role in reducing the amount of interest paid on your mortgage.

For example, on a $60,000 mortgage amortized over 25 years, a $2,000 per year lump sum payment will reduce the interest cost of your mortgage by over half. Prepayment options are the simplest way to pay off a closed mortgage more quickly.

Most of the larger banks and trust companies have their own name for various prepayment options, but all prepayment options are basically the same. They allow for a certain percentage of a mortgage to be prepaid on either the one-year anniversary date or each calendar year for closed, fixed rate mortgages.

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