Posted onMay 09/2014
Becoming a homeowner is an exciting prospect. But rising house prices means that Canadians are taking out large mortgages. Interest rates are projected to rise, which can put extra pressure on the homebuyer. However, there are some effective ways to save money on your mortgage.
One such money-saving method is known as the 3-legged stool method.
The three-legged stool is a symbol for the three factors which influence your mortgage, and the three-legged stool method involves taking each of these three factors into account when working out how to save money on your mortgage.
The first leg of the stool is your principal, or mortgage amount. Clearly, choosing a cheaper home means you will need a smaller mortgage. However, house prices are rising. In addition to ensuring you are not overextending yourself when choosing your home, you will have to consider the other two legs to save money.
The second leg of the stool is your mortgage rate. You can benefit greatly from professional advice, as mortgage brokers can assist you in getting the best rates. Brokers can often get better rates than banks.
For example, even with a negotiated rate that is 0.30% less than the rate the bank offered, you can save over $25,000 over 25 years. This figure is based on a $280,000 mortgage with 20% down on a $350,000 home.
The third and final leg of the stool is the amortization period. This is the total time it will take you to pay off your mortgage. The maximum amortization period is 25 years, and many people sign for 25 years. However, shortening your amortization period to 20 years will give you substantial savings, though your monthly payments would of course rise.
For example, a period of 20 years on at $280,000 mortgage with a fixed rate of 2.90 would save you over $24,000 when compared with a period of 25 years.
Shortening any of these legs will help save money, but the most effective way is to shorten all 3 legs. Just as ensuring all legs are the same height makes a stool stable, saving money with the 3-legged stool method is the most financially stable way to save your money.
3-legged stood method for retirement planning
The 3-legged stool method does not only apply to mortgages, but can refer to other financial situations, such as planning for your retirement.
In this case, the 3 legs of the retirement planning stool you must balance for financial stability are
- tax-deferred savings strategies
- after-tax savings strategies
- tax-free savings strategies
Sources used in researching this article include Ratehub: Save Money on Your Mortgage Using the Three-Legged Stool Method and Amazon.com: The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning