Owning your own home is a dream come true for the majority of us, but while having enough money for a down payment is a huge achievement, the journey is far from over. When buying a home, most people need to opt for a mortgage, which typically takes anywhere between 15 and 30 years to pay off.
The sooner your mortgage is paid off, the less interest you will be required to pay – which might mean you get to save hundreds of thousands of dollars. While interest rates are good now, they can always rise in the future and the sooner you become debt free the better. Read on to see how you can pay off your mortgage faster and save thousands of dollars.
Switch to Accelerated Payments
A typical mortgage plan requires you to make monthly payments; however, there are alternative options. Weekly or bi-weekly plans more or less amount to the same value per month as a single monthly payment, but they allow you to pay off a little chunk extra each year – potentially shaving up to 3 years off your mortgage.
How does it work? While there are only 12 months in a year, there are 13 four-week periods and 52 weeks. Over time this adds up and cuts the years down, potentially saving you thousands of dollars in interest.
Round Up Your Repayments
Ideal for those with an aversion to odd numbers, another sure-fire method of chipping away at your mortgage is to round up your payments. For example, if you’re currently paying $354.97 every two weeks, you could round it up to $400. You’re unlikely to miss the additional $45.03 every fortnight, but this can go a long way to reducing your mortgage by as much as an additional 3 years.
An ideal time to round up your repayments is after a pay-rise, when you go up to a pay bracket that might be, for example, $50 or perhaps $100 more than it was before. In this way, you’re not really losing out on the new funds available to you, as you were already budgeting without taking them into consideration.
Make Lump-Sum Prepayments
Most lenders allow you to make one or two lump-sum payments per year. This can really help reduce your mortgage and there are a number of ways to do this. Anniversary payments can be set up, allowing you to deposit a lump sum each year on the anniversary of the mortgage. You can save for this throughout the year.
Alternatively, any unexpected cash, such as tax rebates, bonuses, inheritance or lotto wins, can also go towards your mortgage. Again, this cash was not a part of your original budget, so it won’t really be missed.
Avoid Reducing Payments When Rates Fall
When the time comes to renew or renegotiate your mortgage, you may find that rates have dropped, allowing you to make smaller repayments. If this is the case, it’s well worth declining the offer and sticking with what you’re already paying. Since your budget is worked out to facilitate this payment already, it’s not as if you’re paying extra, and the benefits can be extraordinary in the long run.
Stay Informed about Interest Rates and Options
Once your mortgage is set up, it’s all too easy to sit back and let the automatic repayments do their own thing. However, you could be missing out on far better rates or payment options. Do your research and carry out periodic checks to see if you can benefit from switching your mortgage provider.
You will have to weigh up the cost of paying the penalty for breaking your current agreement against the benefits of a new contract. In the long run the newer option could save you thousands of dollars and reduce your amortization period by years.
Understand the Terms of Your Mortgage
Finally, each mortgage is subject to different terms and conditions and it’s well worth fully understanding your agreement. Prepayment terms can differ depending on the lender, your circumstances and your location, so be sure to do your research before making any changes.
Many lenders will only allow you to pay a certain amount in lump-sums each year and there can be strict – and expensive – penalties for paying too much. Likewise, some lenders will hit you with a penalty for paying your mortgage off too early. Know these restrictions and plan around them.
While it’s easy to let the automatic monthly payments run on their own steam, you can potentially save hundreds of thousands of dollars in interest by getting involved in the process and speeding things up a bit!
This article is intended for informational purposes only and should not be deemed as legal, financial or investment advice or solicitation of any kind. Before purchasing real estate or insurance, always consult with a licensed attorney, financial advisor, insurance agent and real estate broker.