How can I repay my capital faster?
Typically, you pay off your principal quite slowly because you have to take care of a significant portion of the interest before your payments start to reduce your loan balance. But what if you want to pay off your capital faster? Paying off your loan faster can help you build equity and shorten your loan term, allowing you to build wealth and save on interest paid over the life of the loan.
So how can you do it? Let’s talk about a few ways you can work to pay off your mortgage sooner.
Regardless of the size of your loan, your monthly mortgage payment is probably a little overwhelming. Principal, interest, taxes, and insurance all together can add up to a hefty bill to pay each month. One way to make that payment more manageable (and help you pay more, faster) is to make bi-weekly mortgage payments rather than monthly payments.
If you typically pay $ 1,500 per month, switching to a bi-weekly schedule would mean paying $ 750 bi-weekly instead. Splitting payments can help make your budget more manageable week after week – and switching to a bi-weekly schedule also means you’ll end up paying a little more than if you were just making monthly payments.
In a year, you typically make 12 monthly payments. If you add up all the half payments you would make on a biweekly schedule, you would find that you end up making what equates to 13 full payments instead of 12 – which may not sound like a lot more, but can actually take years. over the life of your loan.
When you make a large down payment at closing, you reduce the amount you will end up paying monthly over the life of your loan. What if you could do the same later in the life of your loan?
This is exactly what you can do by doing a mortgage overhaul, also known as mortgage amortization. A mortgage overhaul allows you to pay a lump sum against the principal balance of your loan, which lowers the cost of your monthly payments in the future.
Not everyone will be able to do it – FHA, VA, USDA and most jumbo loans are not eligible for mortgage overhaul. Lenders will also have their own specific requirements regarding the amount and timing of your contribution.
However, if this option is right for you and you have saved some money to invest in the loan, it can help you significantly reduce the amount you still owe on your balance.
Make additional payments
The only extra payment made when you pay bi-weekly rather than monthly can help you pay off your mortgage faster. Some homeowners may choose to make a payment of a month and a half each month rather than their regular payment, which can help speed up their loan repayment time considerably.
If you can commit to making additional payments, it will reduce the amount of interest you will pay over time because you are reducing the principal amount at a higher rate.
For example, let’s say you take out a 30-year fixed loan of $ 175,000 at 4% interest to buy a house. During the term of the loan, you can expect to pay $ 125,771.64 in interest. This is almost the size of the principal balance of the loan itself!
If you paid $ 100 more each month on your mortgage payments, you could reduce that amount of interest to a more manageable $ 99,650.33. This represents $ 26,121.31 in total savings, which is a significant amount.
Refinance your 30-year term into a 15-year mortgage
For those who are really determined to achieve financial independence and pay off their loan as soon as possible, refinancing your mortgage for a shorter term is another way to pay off the principal much faster, even if it means monthly payments. higher.
If you refinance a 30-year loan to a 15-year loan, you can pay off the principal balance in half the time, but your payments will be significantly higher each month. If you can rock it financially, it’s a great way to prepay your home and take the stress out of monthly mortgage payments for good.
It will save you a lot of interest by switching to a shorter term, but there are also a lot of costs associated with refinancing. Expect much higher monthly payments as well as various costs associated with refinancing such as application fees, appraisal fees, title search fees, and more.