It’s easy to ignore your mortgage statement, particularly in the first few years after you buy your home and it seems like all your money is going to pay interest payments. But there are good reasons for taking the time to understand the information about what is likely your single biggest investment.
The annual mortgage statement can be often relegated to the back burner for the simple reason that it seems like it will take forever to get the loan paid off. This is especially so for people who are into the first couple of years of a lengthy amortization term involving hundreds of thousands of dollars and it seems like the bank is just vacuuming up every dollar of payments in interest.
But it’s wrong to think that way. For one thing, that statement tells you when your current mortgage term is up. And if you’re just a short time away from the expiration of your one-year mortgage, you really want to weigh the pros and cons of keeping the term short – or consider whether it’s time to lock in for a longer term.
For another, banks aren’t perfect and you want to double check their arithmetic.
And from a strictly emotional point of view, you can get a lot of pleasure from seeing that difference between interest (what goes to the bank) and principal (how much you’re actually paying down) even out. It gets even better when you eventually see the statement showing you’re paying a lot more in principal than interest.
While the statement serves as a constant reminder of where you stand in paying off your home, it can also make you think about increasing your payments. Remember – the more you pay out every month, the faster the home gets paid off. And the potential savings you get by paying it off more quickly can run into scores of thousands of dollars.
So, let’s decipher a typical mortgage statement. From the top . . .
Interest Rate: Let’s say it’s three per cent. This is the amount of interest you agreed to pay for your mortgage.
Maturity Date: This is when the term of that mortgage loan expires. For example, the statement date is Dec. 31, 2015 and your mortgage maturity date is March 1, 2017. If this is a five year mortgage, this means you took out the mortgage March 1, 2012 and that it has 14 more months to run. Mortgages don’t just roll over – you’re going to have to decide prior to March 1, 2017 what sort of term you want to go for.
Regular Payment: The statement says it’s $1,000. This could be your monthly payment – or your weekly payment. It all depends on the schedule you agreed on when you agreed to the mortgage terms. Paying monthly is more expensive than paying weekly or bi-weekly, since a weekly or bi-weekly payment means you’re making one additional payment every year. That can cut years from your amortization and save you a lot of money.
Payments in Arrears at Date of Statement: Perhaps you had to miss a payment or two because of a financial crisis. This will tell you how much you are in arrears.
Other information will detail the name(s) of the person/people who own the house and the address.
Balance at Previous Date of Statement: This figure tells you how much you owed the bank a year ago.
Principal Reduction: This tells you how much of your payments were actually applied to paying down the mortgage.
Balance at Year End: This tells you how much is owing on your mortgage.
There will also be a column dealing with Payment Distribution. This is typically divided into:
- Interest: This details how much money the bank collected in purely interest payments during the year.
- Principal: This explains how much actually went to paying off the loan.
- Mortgage Insurance: Mortgage insurance is typically required if you don’t have a 20 per cent down payment. However, many people who managed to pony up that amount still opt for mortgage insurance, bought from the lender, as a hedge against serious illness or death. The figure tells you what your premiums totalled during the year.
- Total Payments: The sum total of what you paid the lender during the year, applied to both principal and interest.
In the early years, it can be rather disheartening to see how much the bank is taking away in interest payments. But the passage of time will help with this as the more you pay off in principal, the less the bank charges for interest. And remember – if you voluntarily increase your payments, all that extra money goes straight to the principal.