What are some proven ways to reduce mortgage principal effectively and slash some years off your home loan?
The thought of going through the whole process of buying a home is intimidating for many. Aside from the anxiety of finding a property that is within your budget, there’s the nagging worry of getting a mortgage. Not to mention all the tricky decision-making that comes with it.
A good course of action to fight this anxiety is to learn about the mortgage process and its technicalities as much as possible. Such knowledge can help you gain a better understanding of the situation you are (or will be) in and hopefully guide you in making better decisions about home buying.
One of the most common terms in mortgage that mortgage borrowers should pay attention to is the principal. In simple terms, the principal is the amount of money you owe from your lender less the amounts repaid to the lender.Get today’s rates. Click here.
The principal makes up the bulk of your monthly mortgage payments. On a typical 30-year fixed-rate mortgage, payments are structured so that your first payments erode the interest while the part that goes to paying off the principal increases every year. As the principal is reduced, the interest decreases so more of each month’s payment goes toward the principal.
Understanding your payment structure allows you to design some strategy to pay off your mortgage early and save on interest payments.
Here, we have outlined some of the most common principal reduction strategies.
Biweekly Payment Plan
Instead of paying one bulk payment monthly, this kind of arrangement requires you to divide your monthly payments into two which you pay to your lender every two weeks. How soon you can pay off your mortgage using this method is dependent on the size of your mortgage and how soon you use the program.
Paying Extra Monthly
You don’t really need a principal reduction program specifically imposed by your lender. You can just opt to put some extra dollars every month to pay off your principal month per month. To do this, you must correctly designate your online payments or bank checks to ensure they go to the appropriate designations. With the current 4 percent interest rate, you can successfully reduce a year and a half on your $400,000 mortgage, with around $18,000 to $20,000 savings on interest payments.Need financing? Talk to us.
Pay a Lump Sum
Pay a lump sum and as early as possible. If you have some savings set aside which you want to put into use, eroding a good chunk of your mortgage principal is a wise decision. Paying a lump sum – and during the early years of your mortgage will slash a significant number of years from your amortization period. The earlier, the better.
Pay Extra Every a Year
Instead of paying a little every month, you can instead pay one or two months worth of extra mortgage payments every year. Some experts suggest that in order to do this, you can save a twelfth of how much you get every month and pay the total of these savings to your lender at the end of the year. Not only does this help you slash some years off your mortgage payment period; it also gives you room to use your extra savings for some other important expenses.
Paying off your mortgage early, however, may entail having to pay a fee. These are called prepayment penalties. Speak with your lender if you have a plan to reduce your principal payments via one or a combination of these methods to come up with a favorable arrangement and agreement on the costs.Click to See the Latest Mortgage Rates»