Not everybody has the money to pay for a home in cash. So naturally, as many Americans do, we resort to financing. A month’s home loan payment is comprised of a principal payment and an interest payment, spread throughout the life of the loan, which can be paid in 10 to 40 years’ time.
But many anxious homeowners are set at paying off their home debts faster and one of the most common techniques used by these homeowners is to pay one extra payment per year. Does this really work? What are its advantages and are they really significant in the long run?
The more extra payments you make, the more you save on the interest you pay on the loan. This is because the interest rate applies on the outstanding balance owed. So the loan decreases with every extra payment made. This could even result to more savings when you take out a fixed-rate loan on a market with rising interest rates.
You are not pressured to sticking to a savings plan that could potentially leave less room for adjustments when your finances get tight. You can do it whenever you want, however you want. You can either add a few dollars a month to your payments, or do a lump sum at the end of the year.
A single lump sum payment annually does not seem to be much, but when accumulated, they could help you save thousands of dollars on interest costs, while slashing off a significant number of years from your payment term. Faster payment means faster homeownership.
Consult your financial advisor or ask the help of a mortgage expert to help you get hold of the most effective payment tips and tricks. These may vary and the effectiveness of each depends on your financial plans in the future. So don’t rush and see to it that you are not compromising other important expenses in planning your payments and savings budget.