Your home mortgage is often the largest debt most people have. To buy a home, taking out a mortgage is necessary, but have you thought about a mortgage debt reduction plan to pay it off quickly?
Mortgage debt reduction needs to be a long-term goal, but it does not need to be difficult. There are several simple ways to reduce your mortgage quickly and cut down the loan term dramatically. You have the option of using one or a combination of any of the tips mentioned below as part of your mortgage debt reduction strategy.
Payment Frequency
When a bank calculates your mortgage repayments, they use a calculation known as ‘amortization.’ This allows them to work out how much you need to pay each month so that a portion of your payment goes towards paying down your balance and the other portion of your payment is interest charged on your balance owing. They tell you how much you need to pay in monthly installments to pay off your loan over the exact loan term written on your mortgage contract.
However, if you are paid bi-weekly or even weekly, you can adjust your repayments to the same frequency for which you get paid. This not only makes budgeting much easier to pay a smaller portion each pay period, but it can also cut years off your loan term and save you thousands in interest.
Call your lender and ask them to adjust your payment frequency to bi-weekly but be certain you work out your calculation amounts before you call.
Bi-Weekly Calculations
Find out exactly how much your minimum monthly payment will be and then divide it by two if paid bi-weekly. If you are paid weekly, then divide your monthly payment by four. Do not use any fancy calculations or try to figure out how many weeks in a year and then divide by how many fortnights. This will not work. Divide your minimum monthly repayment by two for bi-weekly or divide by four if you are paid weekly. Write this figure down. It is your new minimum repayment. You will pay this new amount every time you are paid.
More than Minimum
Once you have your new bi-weekly minimum repayment, you have worked out, round this figure up to the nearest $5. For example, if your payment comes to $423.24, then round this up to $425. This small amount will not break your budget, and you’ll find it easier to remember how much you need to pay.
Rounding up your repayments seems like such a small amount of money, yet it can save you tens of thousands of dollars in interest and reduce your loan term dramatically.
Lump-Sum Reductions
Lenders calculate your interest repayments based on the balance you owe at the end of every day. Then they add up how much interest has accumulated and shown you one simple figure at the end of the month. By making more regular payments, such as weekly or bi-weekly payments, and then rounding up those amounts, you reduce the amount you owe on a more regular basis. This reduces the amount of interest the bank can charge you.
If you receive a pay raise or a tax refund or a bonus or earn some extra cash from a yard sale, pay it as a lump sum payment off your mortgage. This reduces your outstanding balance and lowers the amount of interest you will be charged. Mortgage debt reduction is as simple as finding a plan and sticking to it.
Examples
If you have a $250,000 mortgage with a 3.5% interest rate, your monthly payment would be $1,119.35, and over 30 years, you will pay $155,047.38 in interest. But what if you paid an additional $30.65 per month in principal? It results in almost 15 months of fewer payments, and you will only pay $146,945.71 in interest, saving you almost $8,100 in interest. All that for less than $31 a month in extra payments. What would happen if you rounded the monthly payment up to an even $1,200? You would knock off almost 38 months in payments resulting in interest payments of $135,482.71, a savings of $19,564.67, all for an extra $80.65 a month. It pays to make at least a little extra payment towards your principal monthly, as these examples illustrate.
Please feel free to reach out to me directly or seek out any fee-only Registered Financial Consultant for more information.
