Having a home loan can be stressful. It’s very likely that a home loan will be the largest chunk of debt you will ever have in your life. Even though a home loan is “secured” debt – debt that is backed by collateral – and is considered “good debt,” such a large financial obligation often makes borrowers uncomfortable. There are many ways to pay off your home loan faster, which will both make you more comfortable and save you a lot of money.
Paying off a mortgage quickly saves money because of the interest that compounds as the debt is slowly paid off. Less principle means a smaller base for the interest rate to apply to, so anything you can do the decrease your principle quicker will go a long way to saving a lot over the whole life of the loan. Here are some helpful tips for paying off your loan faster than just making the minimum monthly payments.
Taking advantage of variable rates
If you’re the “play the market” type of borrower who decided to get a variable interest rate home loan in order to take advantage of the various shifts in the economy and the ever changing real estate market, then you can make that variable rate work for you when it does drop. Instead of using the lower rate to save money now by paying less, you can use the decreased required monthly payment to save more in the long run. How? Keep paying the same amount. Let’s say, for example, your monthly mortgage payment was $1500. After your variable rate dropped due to economic fluctuations, your payment became $1300 per month. Instead of pocketing the extra $200 per month for short term gain, keep paying the $1500. You’re used to it and you’ve budgeted for it, and every extra amount you pay comes right off the principle, meaning there is less of a base to build interest later. Paying extra is always a great way to save money and pay off a loan faster, and this way to do it is absolutely painless.
Change your payment schedule
Let’s say once per month, you pay your mortgage in a lump sum and then you do nothing until the following month. Did you know that, if you start paying your mortgage every other week, you can make a full extra monthly payment per year? Let’s look at an example. If you pay $1500 per month for your mortgage, that means you end up paying $18,000 for the year. Now let’s divide that $1500 in half ($750) and pay it every other week instead. Since there are 26 fortnights in a year, that means that you will end up paying $19,500 toward your mortgage when the year is over. The difference between paying $1500 monthly and paying half of that amount fortnightly works out to an extra month each year. That’s a significant savings that will help reduce your home loan faster. An added benefit is that lower, more regular payments make budgeting a lot easier than trying to decide when it’s the best time over the course of a month to pull a large lump sum from your bank account. The only drawback to paying fortnightly is that you should check with your lender first. They may charge a fee for processing increased payments or they may have restrictions on this.
Budget constantly!
Online budget calculators make figuring out your household’s extra funds very easy. After you have assembled all your records of incoming money and outgoing payments (everything from bills to groceries, loans to entertainment and everything in between), sit down and work out your budget using an online budget calculator. As a result of using this calculator, you will see your household’s surplus every month. You can then evaluate this surplus and decide how much extra you can pay toward your mortgage in order to reduce it and get it paid off quicker. You should reevaluate your budget regularly, especially as you pay off debt or work to tighten your belt by decreasing other expenditures. Your household budget will change regularly, and so will your surplus and the extra amount you can afford to put toward your budget.
Windfalls are not free money
Have you come into some unplanned extra funds due to an inheritance, tax refund, lottery, etc? Many people would be tempted to use this surprise windfall to indulge themselves with a vacation or a new TV, new car, or some other expenditure that grants some short term fulfillment. But not you; you’re a savvy borrower, right? Unexpected large sums of cash are an excellent source of funds to knock down that principle and reduce the amount of your mortgage. You will save a lot of money by putting these windfalls toward your mortgage, so don’t be tempted to splurge when you have a mortgage you could lower instead.
Another easy way to pay a little extra
Besides paying your mortgage fortnightly instead of monthly, here’s another way to change your payments and end up paying an extra month each year. Divide your monthly payment by 12, and then add this amount to your monthly payment. Let’s stick to the $1500 per month payment example. $1500 divided by 12 is $125. If you’re already paying $1500 per month, can you afford $1625 per month instead? If so, you will end up paying $19,500 by year’s end and, just like in the previous example where we paid every other week instead of monthly, you will pay off an additional one month each year, decreasing your principal faster and reducing your loan amount more than you would just paying the minimum monthly amount.
Make your first payment right away, not in a month
When you sign all the paperwork, hand over the down payment check and get the keys to your house, you will find out that the first payment on your home loan is not due for a month or maybe even longer depending on the terms you negotiated with the lender and the date of settlement. This is not the bonus you think it is! Interest is accruing throughout that month or more, placing you in even more debt. Instead of waiting for that first payment to be due and pocketing that money, start paying your loan right away. This will get you into the habit of paying your loan and will actually reduce your principle – since no payment is technically due, the payments come right off the principle. It’s a fast, easy way to reduce your loan a little. You’ve already budgeted for the payment amount, so you should be disciplined and get started right away.
Start paying extra right away, not “later”
Are you seeing a trend here, where good habits should start now, not sometime in the future? Well it’s true. As you start your life as a home owner, you will discover that there’s always something that you need to spend money on. Small projects such as window treatments, decoration, appliances and more will always seem to come up and eat into your budget. If you put off paying extra toward your loan, thinking that you’ll “start soon,” then you’ll eventually realize – maybe 10 years into your loan – than “soon” never comes. Instead of learning this tough lesson, you need to be a disciplined borrower. Plan your budget and start paying extra right away. Then plan your budget again, factoring in the extra payments, and use the surplus from this budget session to determine how much you can spend on those incidentals that always come up. Getting into good habits like paying extra right away guarantee that you will not falter in your quest to reduce the principle of your loan quickly and pay off your mortgage faster.