Most homebuyers, especially first-timers, will choose a 30-year mortgage term because this is the cheapest option. Never mind that the interest payments will total to almost $40,000. The point is that this is what they can afford for now. And while that’s completely understandable, it shouldn’t stop you from finding ways to pay off the loan faster and accrue less interest.
If you are planning for early retirement or don’t want to be saddled with repayments for the next 30 years of your life, you should seriously think about how to pay off your mortgage loan faster. It’s not impossible, too. A better salary and income stream should force you to look into how to shorten your mortgage term. If you can afford to add $100 to your monthly amortization, that will go a long way toward shortening the term of your loan.
Paying off a 30-year Loan in 15 Years
Why wouldn’t this be possible? A home mortgage usually has a 4.75% interest rate. For a $150,000 property, that’s around $626 a month. That’s fine if you have a lowly salary and you’re starting off with your career. But five years down the road, you might have stumbled into a better income or extra money. The salary might be a little better, and you may be making money on the side, too.
If there’s spare cash in your bank account to pay off your mortgage faster, then take that opportunity. Simply increasing your payments to $828 a month will allow you to finish it off in another 10 years. That means halving your 30-year mortgage term. You will save a total of $38,700 in interest payments. Imagine what that money can do. You’ll save years of agonizing over the money you’re paying the lender.
Restructuring your monthly payments is a little scary if you aren’t sure where the next paycheck will come from. Sure, you have that extra $200 this month, but what about the coming months? You are not forced to have the loan restructured so that you’ll be forced to pay $200 more monthly.
You can pay more when you have the money and pay the minimum if you don’t. The key is to “attack” the principal with extra payments. A $50 extra payment every month will go a long way toward releasing you from debt months earlier. You’re spending that $50 on a fancy dinner every month, so why not reroute that money to your mortgage payments?
You can also use your tax refund to pay off the principal amount. That’s on top of the monthly payments you’ve already made the past year. The bi-weekly payment scheme, wherein it will translate to 13 full payments per year (that’s an extra month), will also help pay off the loan faster. This also helps with budgeting your money since most employees are paid bi-weekly.
But before signing for an accelerated payment schedule, make sure that you have the money for it. If you are going to charge other transactions on your credit card because you’re paying off your mortgage faster, this isn’t a good idea. Credit card interest fees are higher than home mortgage interest.