Paying off your home loan early can help you to fulfill your dream of becoming debt-free. Instead of making the same monthly mortgage payments for the next 30 years, you can save thousands of dollars on the interest by paying off your loan faster. As soon as you have full equity on your home, you will have more cash to build your emergency fund, save for retirement and even offer your child a debt-free college education. Here are 6 simple ways to repay your loan quickly; and most of them are free.
1. Pay every fortnight
Instead of paying your loan at the end of the month, split the payment into two and pay it every two weeks. The concept is quite simple. After one year, you would have made up to 26 half-payments. This is equivalent to 13 monthly payments. Depending on the interest rate, this extra month’s payment can reduce the time required to pay off your loan by 7 to 8 years.
Setting up biweekly payments is not difficult. You only need to calculate how much of your loan and principal plus other loan charges you must pay every two weeks. To make this process easy, you can use a home loan calculator or take these steps:
* Find the total amount you pay for your principal and interest and divide it by two.
* Look for insurance and tax on your loan statement and add it to the amount you obtained in the previous step.
* Ask your lender how they process biweekly payments. Some do it for free, some charge a one-time fee while others don’t do it at all.
* If you have a lender that does not process bi-monthly payments, get a new bank account opened for your mortgage payments. Deposit the half-payment there every fortnight. Then set up an automatic payment to be made after each second deposit.
2. Make one additional payment annually
If your mortgage company does not accept biweekly payments or you find it cumbersome, you can still knock several years off your 30-year mortgage. Just make at least one additional monthly payment every year. It’s quite simple but you need to plan ahead and make a budget for it so you don’t divert the funds to other expenses. One of the best sources for this is your annual tax bonus/return. You may choose to use the whole amount to reduce your loan principal. Depending on how much you pay, you can reduce your term by at least 7 years. If you earn a quarterly bonus at work, use this to further reduce your debt burden.
3. Recast the mortgage
When an unexpected financial windfall comes your way, look towards recasting your mortgage. Many home loan services will do this for you when you are prepared to pay a large amount of money on your principal. Some will recalculate the loan so the term remains the same but you pay a lower amount each month. Other companies will re-amortize your loan so you can reduce the term. While some companies may require the minimum amount of $10,000 others will accept a sum as low as $5,000. Note that this strategy works best when you continue to make your monthly payments after you have used the lump sum to reduce your principal.
4. Choose a mortgage with flexible terms
You can shorten the time to pay off your home loan by refinancing. If you decide to refinance, choose a lender who provides flexible term loans. These loans give you other options besides the conventional 15 or 30-year options. In most cases, you will be allowed to select the term for your loan, which ranges from 8 to 30 years. Taking a shorter term loan means that you will pay less interest. You can work with a mortgage broker who will help you to calculate the minimum term you can afford to use for loan repayment.
5. Set aside all extra income
If you receive any extra income beyond what is in your budget, set it apart to pay your mortgage. Some of this extra cash may come in the form of a surprise wage increase, tax refund or bonus, or dividends from your investment. Paying $10,000 on a $200,000 loan offered at 4.5% can reduce your term by more than 2 years and save you at least $19,000 in interest. However, make sure that you don’t deplete all your life savings just because you want to knock a few years off your mortgage.
6. Reduce your expenses
You can deny yourself a few pleasures and become debt free 3 to 4 years ahead of schedule. For instance, if you take your lunch to work every day, you could save at least 100 dollars in lunch money monthly (or more, depending on where you live). Adding this amount to your mortgage could give you a saving of over $28,000 on your interest. You can also brew your coffee at home and save the money you spend at your favorite coffee shop every day. Paying an additional $20 every month can reduce your loan term by a year and save you more than $7,000.
Paying off your home loan early is a lofty goal to pursue. As long as you are not repaying a loan with a very low-interest rate, and you won’t earn more on your money if you put it in other investments, go ahead and apply these tips. You will shorten the road to becoming debt-free, and you can invest your savings appropriately.
Sasha Belopoljanski is a writer who discovered his passion for providing creative solutions for building brands online. Following this passion, he continues to deliver awesome content through various niches.