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Credit card debt is not the only type of debt most families have. One of the largest debts you likely face is your home loan. While a home loan is not a “bad” debt like credit card debt can be, since your home represents an investment, paying off your home loan more quickly will help your financial situation substantially. Here are some tips to help you as you try to pay off that home loan faster.
Consider Refinancing, but Only if It Helps
Refinancing to a lower rate or a loan with a shorter term can help you pay off your home faster, but do not jump into refinancing without doing your homework first. Almost every lender is going to charge you fees for refinancing. Some common fees to watch for include:
Termination fees on your existing loan (which are particularly high for fixed rate loans)
Application fees
Stamp duty
Valuation
Legal fees
While you may not be able to get out of these fees, especially since some are required by law, you should shop around to find a lender with fair fees. Some will even pay the fees for you in order to get your business, so ask for this.
Once you know what the fees are, compare them to the potential monthly savings on the new loan. How many months will it take for you to earn back what you have spent to refinance? If you stand to come out ahead in a short time, or will have extra money you can use to pay down your loan faster, then refinance and start saving. Most financial experts feel that a savings of at least one percent on your interest rate is necessary for refinancing to be financially advantageous.
Make Extra Repayments
The easiest way to pay your mortgage off early is to make an extra repayment from time to time, but you need to do this the right way. In most 25-year mortgages, the principal and interest of the payment is amortized. This means that at the beginning of your loan, your payment will have more money going towards interest than principal. During the first five to eight years of your mortgage, each payment puts little towards the actual balance of the loan.
If you can make a few extra payments, which go completely towards the principal, you will be able to pay the loan off much faster. This strategy is more effective at the beginning of your mortgage, because you will be cutting the amount of interest you pay over the lifetime of your loan substantially. Just a few extra payments in the first several years of your loan can actually take a year or two off of the total repayment period.
Watch for Fees
Paying your loan off early is a great goal. However, you might be penalized for this. Before you start making extra payments or shopping for a refinance package, find out if your loan will charge you if you pay it off early. Also, find out if you are allowed to make extra payments, as you may be limited to the number you can make.
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