Imagine the day you pay off your housing loan. Won't that be a happy occasion?
Want to get there quicker?
Check out these 5 tips that will help you sprint toward the finish line -- and without a lot of stress.
1. Increase Your Payment
I know what you're thinking you're thinking: "Increase payments? I'm already struggling to make the ones I have now!" Consider this: any payment above what's required by the terms of the loan goes directly to the principal.
Your regular payments have two parts. One part goes to pay interest and another part goes to the principal or the amount you owe.
At the beginning of a loan term, payments go almost entirely to interest. This is a result of amortization, which is one of the terms you should know when you have a housing loan.
When you look at the amortization of your loan, you'll see that with each payment you pay a little less interest and a little more principal. In other words, it takes a while to make a dent in your loan.
But if you add a little extra to each payment, you'll see the principal come down faster. That's because extra payments go directly to principal.
It doesn't take a lot to make a difference. Let's say you have a $200,000 loan at 5% annual interest for a 30-year term. The overall interest costs would be just over $186,000.
But if you increase your monthly payments by even a small amount and interest costs drop. Using the example above, if you increased your regular payments by one-twelfth (so that by the end of the year you've paid the equivalent of 13 payments instead of 12), you will pay the housing loan off nearly 4 years ahead of schedule and save about $32,000.
Most people find increasing their payment by even $40 a month won't break their budget.
2. Pay Bi-Weekly Housing Loan Payments
Another stress-free way to reduce the principal faster: pay more frequently.
Most housing loan payments are calculated monthly by default. Arrange for bi-weekly payments instead. This plan works well for people who are paid by their employer every two weeks.
Bi-weekly payments reduce your overall interest cost and duration of the home loan in two ways. First, the more frequent the payments, the less time interest can accrue on the outstanding balance.
Second, bi-weekly payments allow you to make 26 payments in a year as opposed to 12. It's a painless way to chip away at the principal.
3. Make Lump Sum Payments 4 Times a Year
Get into the habit of making regular lump sum payments. This simple act can save you thousands of dollars in interest and close your housing loan sooner.
Provided the terms of your loan agreement allow for lump sum payments without penalty, plan for a modest payment throughout the year.
Again, it doesn't have to be a large amount to make a difference. One idea is to put $100 toward your mortgage with the change of seasons. That routine can help free you from your housing loan years ahead of schedule.
4. Use Half of Windfalls
Make a promise to yourself as soon as you take out a housing loan. If you get a bonus at work, receive an inheritance, or have the good fortune of winning the Powerball, you will put half of it toward your mortgage.
How to handle windfalls often involves philosophy and practicality.
Many financial planners recommend using half because it allows you to enjoy half of the money now and benefit from the other half later. Once again, it links back to using lump sum payments to reduce the principal. In turn, those payments shorten the duration of the loan and reduce interest.
5. Refinance
A different way to pay off your housing loan ahead of schedule is to refinance. But this option is only true under certain conditions.
If you can get a new loan at a lower interest rate than your current loan, refinancing would reduce your interest cost. And if you don't change the payment amount, refinancing can shorten the duration of the loan.
This scenario often applies to people whose bad credit or poor financial standing prompted a lender to impose a high-interest rate for the initial loan. A track record of making payments without incident for a few years often makes it easy to refinance at a lower rate.
Another way to pay your loan off faster through refinancing is to shorten the amortization period. This can work even if the interest rate is a little higher than what you're currently paying.
By getting a 15- or 20-year amortization instead of 25 or 30 years, monthly payments are higher but the pay down rate is faster. If you can afford higher monthly or bi-monthly payments, a shorter amortization period might be right for you.
Finally, don't increase the amount of the loan. When you refinance, look at the amount of principal outstanding on your current loan. That's the number you should shoot for.
If your goal is to be free of a home loan, resist the temptation to get "money in your pocket" by increasing your overall obligation.
But take note: if your current loan is due, you could face penalties for refinancing. Always know the terms and conditions of your loan before seeking to refinance.
Every Dollar Helps
The most important thing to remember when trying to pay off any loan: every dollar helps. Don't get stressed out thinking you have to make huge payments to get ahead. Small and steady is often a more sustainable approach.
You only have to find a few dollars a week and put them toward the principal of your loan. Just think, for the cost of one lunch from a restaurant each week, you could save tens of thousands of dollars in interest and be free of your housing loan sooner than your lender would like!
If you're in the Kansas City metro area and are interested in refinancing your home loan, we can help! Get in touch with us today and we'll help you get your home loan paid in full.
AUTHOR BIO
Will Foster | First State Bank Mortgage Senior Loan Officer
I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.
Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.
The mortgage process can be a little confusing and even overwhelming these days with all of the regulations. I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.