Apparently, many homeowners end up paying more than double the original amount to their lender over the duration of the home loan. However, there are countless ways to actively reduce the interest bill.
The only thing that seems to be common among borrowers is that they do not wish to be the borrowers. In fact, they want to pay off their loan as soon as possible and be debt free. Are you planning on getting a home loan in near future? The time to get the title deed on the property back from the lender might seem a long way away to you. To be honest, it is most likely to be a long away…
It doesn’t mean you have to worry about it all the time. You can follow a few advices to pay off your loan faster and have a large sum of money. Outlined below are some ideas that are most likely to help every borrower along the way.
1. Skip the honeymoon
Honeymoon rates have been a significant marketing tool for lender for a very long time. Their objective is to offer the clients a cheapo rate in order to get them in the door. Once the clients agree, the lenders try to keep them there at a considerably higher rate for a longer period of time, which obviously allows them to generate more revenue on the deal.
Many lenders in the market turn over your loan to the standard variable rate once the honeymoon is over. Most of them also hit you for pretty step exit penalties provided that you want to refinance prior to the time when you are on their standard rate for 2-3 years. The basic concern is that the variable rate offered to the users is normally much higher than the lower basic loans. Indeed, you might find that if the introductory rate is averaged with the variable rate, you are paying your lender up to 0.5 percent more than you may otherwise pay.
2. Get a low-priced loan, pay at a pricey rate
While the average rates are lower, why don’t you try to get ahead of them? Use a variable loan that is available at the lowest rate possible and make your monthly payments as if you are paying for an expensive loan. For example, if you have got a loan at 5% and you are making monthly payments at 8%, any unpredictable increase in the rates would seem negligible to you, and you will be able to pay your loan off quicker.
3. Make the mortgage your main financial product
Mortgage products allow you to utilize your mortgage as your main financial product. It can make an enormous difference if you have a mortgage that can easily be paid via your income using a credit card, cheque book and EFTPOS. Since your entire pay goes into the mortgage account, you are substantially reducing the standard on which interest is charged. You might take a few steps back when you withdraw living expenses. However, careful usage of this type of product can easily get you far ahead of where you would be with the traditional, pay-once-a-month home loan.
Remember, however, that such types of loans usually have a higher interest rate as compared to other types of loans, because of which they are ideal for the borrowers with higher income. If you make the less money, you are better off with a cheaper variable loan.
4. Pay your loan off quickly
As we all understand, time is money. You a number of techniques for paying lower interest on your home loan to choose from, but all of them conclude only one thing – pay off you loan as quickly as possible. You can consider the following example:
Let’s assume that you got a loan of 300,000 USD at 6 percent interest. If the loan is to be paid over a period of 30 years, your monthly payment would be around 1,799 USD, which equates to an interested repayment of 347,515 USD in total over the term of the loan. On the other hand, if you decide to pay off your loan within 25 years, the monthly payment would be 1,933 USD. The total interest would be only 279,879 USD, which will save you an enormous amount of 67,644 USD.
5. Make repayments frequently
The simplest things in life are usually the best. The simplest and finest strategy to reduce both the cost and term of your loan is to try paying fortnightly instead of monthly. You must be wondering what possible advantage it can offer.
You will split the monthly payment into two and pay that amount every fortnight. The difference is hardly significant. You can save yourself a large sum of money, since there are just 12 months a year, but 26 fortnights. This means that you will make 13 monthly payments for your loan every year if you pay fortnightly, which can be highly beneficial.
6. Hit the principal as early as possible
It might seem that you are just paying the interest and the principal is not reducing during the initial few months of your mortgage. To be honest, you are right! Most of your repayments usually go to compensating interest early in your home loan. Therefore, it is your best bet to do anything that might get your principal repaid as early as possible. You will definitely feel the difference.
7. A buck today vs. a buck tomorrow
The time value of your money is probably the most important factor to consider while choosing a loan. The value of currency varies with time. A dollar today isn’t necessarily going to be worth the same in the future. Consider the following example:
You have to identical loans to choose from. One requires you to pay 100 USD per year over a period of 10 years and the other one requires a 1,000-USD upfront fee. Which one in your opinion is better?
With the first loan you can easily pay your 100 USD at the beginning of your loan, and put the rest of money (i.e. 900 USD) in a bank account (interesting bearing). The money will be sitting in your account, and you’ll easily be able to pay 100 USD every year, which is a better option.
About the Author: Ali Khan is a freelance writer who enjoys writing about personal finance topics as well as many other subjects and for many different businesses, including LEDA Real Estate.