How can I repay my principal faster?
You usually repay your principal quite slowly, as you have to take care of a significant portion of the interest before your payments start to dent your loan balance. But what if you want to pay off your principal faster? Paying off your loan faster can help you build capital and shorten the term of your loan, 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.
Payments every two weeks
Regardless of the size of your loan, your monthly mortgage payment is probably a bit overwhelming. Principal, interest, taxes and insurance can all add up to a hefty bill to pay each month. One solution to make this payment more manageable (as well as helping you pay more, faster) is to make mortgage payments every two weeks rather than monthly.
If you typically pay $1,500 per month, switching to a bi-weekly schedule would mean you’d be paying $750 every 2 weeks instead. Splitting payments can help you budget more manageable, week after week – and switching to a bi-weekly schedule also means you’ll end up paying a bit more than if you just made monthly payments.
In a year, you would typically make 12 payments on a monthly schedule. If you add up all the half payments you would make every two weeks, you’ll find that you end up making what equates to 13 full payments instead of 12 – which might not seem like a lot more, but can actually take years over the term of your loan.
When you make a large down payment at closing, you reduce the amount you’ll end up paying monthly for the life of your loan. What if you could do the same later in your loan term?
You can do this by doing a mortgage overhaul – also called a mortgage reamortization. A mortgage overhaul allows you to pay a lump sum for the principal balance of your loan, reducing the cost of your monthly payments in the future.
Not everyone will be able to do this – FHA, VA, USDA and most jumbo loans are not eligible for mortgage overhaul. Lenders will also have their own specific requirements as to how much you can contribute and when.
If it’s an option for you, however, and you’ve saved money for the loan, it can help significantly reduce the amount you still have to pay on your balance.
Make additional payments
The one extra payment made when you pay bi-weekly rather than monthly can help you pay off your mortgage faster – so naturally the extra payments will add to that. Some homeowners may choose to make a one-and-a-half-month payment each month instead of their usual payment, which can help significantly speed up their loan repayment time.
If you can commit to making additional payments, it will reduce the amount of interest you pay over time, as you reduce the principal amount at a higher rate.
For example, suppose you take out a $175,000 fixed loan for 30 years at 4% interest to buy a house. Over the life of the loan, you can expect to pay $125,771.64 in interest. That’s almost the size of the principal loan balance itself!
If you’re paying $100 more each month on your mortgage payments, you could reduce that interest amount 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 truly determined to achieve financial independence and pay off their loan as quickly as possible, refinancing your shorter-term mortgage is another way to pay off 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 balance it financially, it’s a great way to pay off your home ahead of time and take the stress out of monthly mortgage payments for good.
It will save you a lot on interest by switching to a shorter term, but refinancing also comes with a lot of costs. Expect much higher monthly payments as well as various costs associated with refinancing, such as application fees, appraisal fees, title search fees, etc.