So now you have a mortgage. Maybe it’s new to you or perhaps you’ve had it for some time now. Eventually, all home owners find themselves wondering how they might be able pay their mortgage off faster. Think about the size of a mortgage and the time it takes to pay it off. That’s a lot of interest and in the end, home owners end up paying a lot more than the “sticker price” of the home. Paying off a mortgage faster makes a lot of sense from a savings standpoint. It also builds equity quicker and helps build a better credit score. Here are some ways you can get that mortgage off the books sooner.
Refinancing
When you refinance, you get a new loan that pays off the existing mortgage. Homeowners typically refinance for better rates. It could be that the Reserve Bank of Australia lowered their rates, causing fixed and variable rates to drop dramatically. Refinancing for a lower interest rate can mean big cost savings over time. In addition to this long-term gain, savvy borrowers can save monthly by paying the same amount they did before on the new mortgage. For example, if your minimum monthly mortgage payment was $2000 and now, after refinancing, it’s $1800, you should continue to pay that $2000 every month. Why not? You’ve already budgeted for it. That’s an extra payment and a half you’ll be making each year.
Some borrowers refinance for a more aggressive payoff schedule. For example, a home owner might have 20 years left on a 30 year mortgage. This home owner might have some extra money to spend and decide to refinance for with a 15 year mortgage. This will lead to higher monthly payments and a faster payoff.
Paying Extra by Paying Fortnightly
Most of us receive a paycheque every other week. Instead of making one monthly payment of the minimum mortgage amount, divide that number in half and pay a half mortgage every payday. Sure, there’s the budgetary benefit of paying this way, since $1000 out of your pocket every fortnight is easier to bear than a $2000 lump sum. But there’s also an added benefit. Paying this way causes you to make one extra home payment per year. Consider the $2000 monthly mortgage. In one year, that’s $24,000 if paid monthly. Since there are 26 fortnights in a year, paying every other week works out to $26,000 paid yearly. Pay this way for 12 years and you’ll have taken a full year off your mortgage. This si a great way to get a home loan paid off quicker.
Start Paying Extra Straight Away
At the start of a loan, when you’ve just moved in, it’s easy to get caught up in paying for other things. Why put extra funds toward the loan when, for example, the carpet needs to be redone? The problem with this line of thinking is that home owners will always find some home project that supersedes the need to pay extra to the mortgage. Instead of falling into this trap you need to be a disciplined mortgage borrower. Create a home budget before you even move in and factor extra funds for the mortgage into it from the start. This will get you into the habit of paying exra and will make it pretty painless.
Take Advantage of Windfalls
When refunds, inheritances and other surprise funds come our way, our first instinct is to splurge and treat ourselves to a car, a vacation or another luxury. Instead of wasting this “free money” on a one-time treat that you’ll forget about in a year, put this money toward the mortgage. It’s not as fun as a holiday, but it’s an easy way to pay of some of the mortgage principal and is a huge benefit in the long run.
Budgeting is Important
We’ve mentioned “the B word” several times in this article, and with good reason. It’s hard to have discipline and impossible to allocate additional funds for your mortgage if you don’t know what your household is spending every month. Work out your home budget right now. Gather all information on money coming in, bills other expenditures like groceries, entertainment and more. Figure out what your monthly surplus is and allocate some of that for extra mortgage funds. If you have no surplus, carefully examine your spending and find ways to cut it down.
When faced with a big mortgage, it’s hard to think $100 here and $250 there will help. It’s very easy to say, “that little bit extra is a drop in the bucket compared to my $300,000 mortgage.” Just remember that all those drops add up. Over time, small extra payments can take years off a mortgage. It’s not that hard to do and every home owner can pay of their mortgage faster with just a few simple tricks.