Getting control of your financial future by paying off your loan faster can be achieved in a few simple steps.
Imagine you pay your mortgage off early. You won't have the financial and mental stress of making repayments and watching interest rates and you'll have built up a large amount of equity in your home.
You'll now have many options - will you take advantage of the freedom to purchase an investment, go on a holiday or buy a new car? The choice is yours.
A home is an asset. This is the reason why you can use it as leverage to your financial future. Remember that your equity is always safe and readily accessible to you anytime even if you pay off your loan completely. Paying off your mortgage faster also helps you to avoid paying interest over a long period of time.
For many, owning a home is one of the biggest decisions they'll could make. This is why it makes sense to sit down and think about how soon you want to pay off your loan.
Paying off a home loan lessens the burden on your finances. It can give you a sense of relief and freedom to know that you no longer have this huge obligation. In addition, if you accelerate your monthly mortgage payments with the goal of paying it off completely, you continue to assume ownership of a bigger share of your home; therefore giving the bank less control.
Take this example:
Barbara and Mark
Barbara and Mark were first home buyers with a $450,000 loan balance and a 25 year mortgage on their home and wanted to pay off this amount as soon as possible.
The couple wanted to lessen the interest payments that the bank charged each month and eliminate the debt that came with mortgage payments and a large loan amount.
Being newlyweds with no children yet, they also believed that they had an opportunity to manage their money more efficiently now and in the near future without further financial responsibilities.
The steps they took
Barbara and Mark researched many different options to help them pay off their loan early. This included also seeking professional advice from a licensed financial planner. These are the steps they took:
Regular extra repayments. For one, they were advised to make extra payments each month to the lender. This is known as accelerated payments and when done wisely, it can take off years from the loan term.
One way to do this was through the couple assuming a bi-weekly home loan payment structure. This enabled them to squeeze in an extra repayment each year, shaving years off their loan term and saving them thousands in interest.
Lump sum payments. Barbara and Mark used a lump sum calculator to work out that any spare cash they had from tax returns, gifts or bonuses would greatly reduce their loan term.
Barbara found that making one $4,000 lump sum payment on their loan in the first six months of having their loan would save them almost $12,000 in interest over the course of their loan and take 5 months of their loan term.
Refinance to a lower rate. Barbara and Mark could've also refinanced their loan to one with a lower interest rate. The monthly payments would be lower and the couple could use the extra money to pay more on their premium each month. They in the end chose not to refinance because the costs in their case would've outweighed the savings they would make.
Over the life of a 25 or 30 year home loan, you could pay up to two times the actual loan amount due to interest. This number is reason enough to come up with a plan to pay off your loan faster.