The sooner a property owner pays off his or her loan, the less that owner will pay to buy the home. That is because interest builds up over time, but paying down the balance sooner can reduce this significantly. Yet, many people simply make the same payment each month, not realizing there could be ways to reduce at least some of what they need to pay. For those looking for an opportunity to save money on their mortgage loan, there are a few key things to consider.
How to Pay Off Mortgage Faster
To pay off a mortgage faster, it is important to recognize any limitations in this process. Most home loans allow an individual to pay off the home sooner than the term specified in the loan. However, some limits may apply here. Some lenders put penalties into the mortgage contract that may require a fee if the home is paid off too soon. This is less common today but could be present in some loans. It is important to check all closing documents for this before moving forward.
Then, consider a variety of ways to pay down the mortgage faster to get out from under the debt sooner. Most people can appreciate the benefit of not having to make monthly payments on their home.
Make Biweekly Payments
One of the best ways to pay off a mortgage faster is to make payments every two weeks instead of one time per month. Most loans are set up to require one payment every month, making 12 full payments each year. Making biweekly payments simply means making half of that monthly payment every two weeks instead of the whole payment at one time.
The benefit here is that during the course of a year, homeowners will then make a total of 13 payments without really feeling the pinch. That is because there are 52 weeks in a year, making 26 payments possible. In short, a full extra payment is made by the property owner.
This method is the easiest option out there. Simply, work with the lender to set up automatic biweekly payments for half of what is owed monthly. This can also make payments easier to make since individuals can manage smaller payments twice a month.
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Add More to the Loan Than Owed with Each Payment
Paying down mortgage loans faster is always the biggest goal. This can be hard to do with just making the required payments. Another way to pay it off sooner is simply to pay more with each payment. For example, if a homeowner’s mortgage payment is $800 a month, paying $400 every two weeks helps. But, paying $425 or more every two weeks is an easy way to chip away at the principle owed faster.
When setting up payments like this, be sure the lender applies any extra payments made to the principle of the loan. It should not be applied to the mortgage owed on the loan. This way, the principle – the amount you borrowed – falls faster. As a result of this, the extra payments are keeping interest lower as well.
Consider Refinancing the Loan
Some homeowners may benefit from refinancing their existing loan into a new, shorter-term loan. This is very beneficial for those who may have obtained a loan with an adjustable interest rate or a high-interest rate over the previous few years. These tend to be very costly to property owners.
Refinancing to a new mortgage may be beneficial if it can offer some key benefits. First, borrowers should look for a low-cost refinance, one without large fees. Closing costs are normal, but should not be more than the savings from refinancing. In addition, seeking out the lowest interest rate possible is also important. This in itself can reduce the amount owed.
A shorter term means there is less time for interest to build. Choosing a 15-year loan instead of a 30-year loan may mean paying more per month on the loan. However, in the long term, borrowers pay off their loan sooner and save money.
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Add Extra Payments
Another key way to reduce costs is to add extra payments to their loan whenever possible. Tax returns, large monetary gifts, and bonuses can work well to reduce what is owed here. These extra payments made at various times of the year can reduce the principle as well. This helps to reduce the amount of time interest can be applied to the account and helps save money on the loan’s total cost.
Paying down mortgage loan balances takes a significant amount of effort and consistency. However, every extra payment made reduces the total cost of buying the home, making it worthwhile.