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By Barry White
Special to the Financial Independence Hub
Mortgage payments can be a huge drain on your budget, particularly if it accounts for a significant part of your income. Apart from the interest you will be paying on the principal, mortgage repayments can be a hindrance to your other long-term financial goals. Not only can paying off a home mortgage early help you save thousands of dollars but it will also help you to gain your financial freedom earlier. If you have made up your mind and eager to pay off your mortgage early, here are seven helpful tips you can implement.
1.) Pay extra on your repayment each month
Making extra payments each month is the easiest way to help lower your debt on the property. Whenever you make your monthly mortgage repayment, most lenders allow borrowers to make an extra payment and mark it as “principal only.” This implies that the extra payment pays down only the principal instead of both the mortgage principal and the loan interest.
Assuming you have a monthly loan repayment amount of $1,346, you can decide to round it up to $1,400. The extra $54 is dedicated as a repayment on the principal. This simple act of extra payment can save you lots of interest charges as well as helping you clear your loan ahead of schedule (since the principal payments will add up faster than you’d think). Therefore, plan to add as much as possible to these payments to help with the principal plus lower the amount of total payments owed. Looking for ways to find extra cash to put on your mortgage? You can use bonuses or apply raises from your job.
2.) Pay more than Monthly, bi-weekly
A bi-weekly mortgage is when you make a payment that equals exactly half of the total monthly repayment every two weeks. This consequently shortens the time to pay off. For instance, if your normal mortgage repayment per month is $1,000, you would instead pay $500 every two weeks. This has almost a similar impact on your budget as one monthly payment. But with the 52 weeks in one year, a bi-weekly payment schedule will bring about a grand total of 13 full monthly payments each year instead of the usual 12. You’ll conveniently be making an extra payment yearly without scrounging around for the extra money.
3.) Make one big extra payment each year
Another great way to repay your mortgage early is to deliberately make an extra payment in a month every year. This helps you settle your mortgage faster, and chances are you wouldn’t miss it. You can schedule the payment for a month when you hardly have any larger expenses, like during holidays. Of course, this technique requires extra discipline from you since you will need to save that payment. To be on the safe side, you can automatically transfer a little amount every month into a dedicated account for an extra mortgage payment.
4.) Divert “free” money towards your mortgage
Did you receive a tax refund or Christmas bonus from work? Divert that extra money that cannot be accounted for in your budget to your mortgage pay-off fund.
It’s basically free money; therefore, you can use it on your mortgage without impacting your budget. The benefit is that you are able to settle your debt faster and also work to reduce your interest rate.
5.) Take advantage of variable rate cuts
A reduced interest rate can lower your mortgage repayments. If your lender agrees to lower the interest rate, ensure to pay off more than the minimum loan repayment due. This helps you save on upcoming interest payments. Be careful not to pay the interest only. This type of loan allows you to pay off lower mortgage repayments for the first few years, but your repayments will be larger when the time comes to settle the principal.
6.) Refinance to get a better interest rate
Most people who refinance their loans do so to lower their monthly repayments. Refinancing your mortgage will not only help you through the repayment a lot faster but also get you a better interest rate. This way, you have more budget flexibility and can make more repayment towards the principal every month without ever increasing your payment. Additionally, you can contact your lender to renegotiate the removal of early repayment penalty to enable you to pay off your mortgage even faster. To refinance your mortgage, it is important you have a good credit score. If you can refinance to a lower interest rate you can definitely save lots of money. Above all, how powerful this option could be is dependent both on your present and the new interest rates.
7.) Avoid late penalty fee
Pay your mortgage on time. Setting up automatic payments can help you avoid paying late fees. If your lender offers online payment, great! If not, make sure you make the payment as soon as possible. A late payment shows you are not credit worthy and the penalty fee that will be incurred will prolong your mortgage repayment period.
Summary
Don’t do more than your capacity. Before you begin to search for homes or find a realtor, it’s important that you are financially prepared and can actually afford the property you want to buy. On the other hand, one of the greatest things that can save you the most money is to have a reduced interest rate. By doing all the simple and helpful tips mentioned above, you can significantly reduce your loan repayment period and save more money in the process.
If you think there is something we are missing or you want to share your experience about how you pay off your mortgage earlier, we’d be glad to hear from you through the comment box below.
Barry White is the owner of RightSwitch; he has a passion for web design and user experience. When not working he enjoys hiking and sea swimming.
