One of the biggest purchases that anybody can make in their lifetime is a house. On an average, most financial institutions like banks will offer mortgages on 25-year amortization payment terms. This may seem like such a long time to pay off your loan, but a lot of people actually prefer this kind of arrangement.
However, just because you have been given 25 years to pay off your mortgage does not mean that you have to wait that long to completely pay off your loan. You can make your mortgage payment terms shorter by doing any one of these things:
1. Make anniversary lump sum payments
Some banks or lending institutions allow you to make yearly lump sum payments that can be applied directly to the principal amount. This means that if the price of your house is $500,000 and you make a lump sum payment of $10,000 this will be applied to the $500,000 principal amount and not to the interest. This effectively decreases your succeeding interest payments since the principal amount it is computed from is also lesser.
2. Make payments more frequent
Instead of paying once a month, try to make payments twice a month. If you have more than enough on your monthly budget, use the extra money to pay off your mortgage. Every bit counts toward making the principal amount smaller. Making two payments in one month could shorten your mortgage by up to 5 years.
3. Round up your payments
If your monthly mortgage amounts to $860, pay $900 every month. The additional $40 would hardly be noticeable especially if you have a good budget plan. Think of it as additional expense and watch your mortgage payment period get reduced by as much as 1 – 2 years.
4. Pay using your bonus
Resist the urge to live like a one-day millionaire every time you receive your bonus. Use that money to make lump sum payments that could go towards the principal amount. Some banks allow you to make multiple payments towards the principal amount in one year.
5. Be informed
Keep records of payments and remaining balances to see how much you have to pay off. Always update your account. The more you understand how your loan works, the better you will become at planning how to pay it off.
6. Be diligent with your payments
Never miss a payment date. The interest charges on late payments could rack up and add to your monthly budget. Use an auto debit facility if available. Otherwise, note the due date of payments and pay at least a day before the due date. Schedule the auto-debit arrangement 3 or 4 days in advance so that even if the due date falls on a weekend or a holiday, your payment will still be applied.
Follow these tips and shave off a few years off your 25-year payment term. Save a lot of money on interests as well. The sooner you commit to clearing your debts, the better your chances of clearing them immediately. Enlist the help your significant other or family in saving up and clearing the loan payments as soon as you can.