Courtney C. Lipsey Owning a house is a wonderful feeling, but paying the mortgage each month for many years can be very frustrating. You want to pay off your mortgage as soon as possible so you can be debt-free.
You can do that with Extra Mortgage Repayment Options. Extra mortgage repayments can also help you save money over time and reduce the length of your loan. Use an extra-repayment calculator for a quick estimate of the amount you will save in time and interest throughout your mortgage if you regularly make additional payments. The results are astounding.
How does extra mortgage repayment work?
Minimum monthly payments on your home loan are the total amount borrowed to buy your home plus the interest. When you pay more than the minimum payment on your home loan, the principal is paid off, which reduces the overall interest rate.
If your home loan is $400,000, and you pay a monthly interest rate of 5.50% for 30 years, then the minimum payment without extra payments would be $2,271. If you choose to pay an additional $200 per month on top of your minimum amount, this will increase the repayment to $2,471. Calculated, you will save $85,714 in interest costs and reduce the loan term by at least five years. You will have more money to spend, and you won’t have to wait as long to pay off your loan. Even if you pay $100 extra, you will still save a lot of money in the future.
You can make extra mortgage payments.
Four different but equally effective methods can be used to make extra mortgage payments. All four will help you reduce your mortgage debt. You can choose from the following types of additional mortgage payments.
1. You can increase the frequency of your repayments
Mortgage repayments are usually made monthly. If you want to get things done faster, you can choose to pay your mortgage on a weekly or fortnightly basis, depending on what suits your budget. You can ask your lender to adjust your repayment schedule to suit your needs.
Take the same example above. Your home loan is $400,000. The interest is 5.50% per month for 30 years. In this instance, your minimum payment is $1,047. If you choose to pay fortnightly and add $200, your repayment will be $1,247.
This will reduce your loan term by nine years and save you $147,821. It’s like paying nine years at once. You can build your equity faster and save money on interest.
2. Paying a lump sum
Making extra payments in lump sums, particularly during the first years of your mortgage, can have a significant impact on the total amount you pay at the end. This will also reduce your loan term, and you’ll be able to enjoy full ownership sooner.
If you pay an additional lump sum of $40,000 in 5 years for your 30-year home loan at a fixed interest rate of 5.50 percent, you will also reduce your total interest by approximately $97,000 over the life of your loan. You can also shorten your loan by nearly five years.
3. You can increase your repayment amount
You can reduce your interest rate by improving your repayments.
If you pay a $2456.35 monthly payment on a loan of $400, with a fixed interest rate of 5.50%, over 25 years, and decide to increase your revenue by $500 after five years, then your minimum charge will be $2,956.35. The interest rate is reduced by $68,092.34 while the loan term is extended by at least five years.
If you prefer, you can increase your repayments to every two weeks or once a week.
4. Create an offset account
You can reduce your interest rate on a loan if you have an offset account. This is because you can pay off the principal with your savings. Your offset account is an account linked to your mortgage. Any money you deposit here will be deducted, and interest will only accrue on the remaining loan.
If your loan is $400 and you have a $30,000 deposit in your offset account, then your loan is reduced to $370,000. The interest is calculated on this amount.
You should save money on your offset account, as you may not be able to make extra repayments.
The conclusion of the article is:
You can choose to pay extra on your mortgage in order to repay your loan more quickly and at a lower interest rate.
Calculate the savings that you can achieve by adjusting your repayment options. With the Calculator for Extra Repayments, you can quickly calculate factors that may affect your minimum repayments, such as interest rate and loan duration.
