- Personal Finance
How to Reduce Your Mortgage Principal Now
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3 Easy Ways to Reduce Your Mortgage Now
Method One – Make One Extra Principle Payment Each Month
You can easily cut your mortgage in half by making one extra principle payment each month. A 30 year mortgage can be reduced to 15 years.
How it Works
When you pay your monthly mortgage payment of principle and interest pay a second amount for the principle portion of the mortgage that is due the following month. Generally your mortgage is a fixed amount e.g. $1,000 per month.
In the Amortisation Schedule example below you can see that the principle payment for the first month is $88.47 and the interest payment is $1,666.67 and the total payment for the first month is $1,755.14.
Using this strategy you would pay the $1,755.14 and $89.21 (second principal payment) in the first month. In the second month you would pay the $1,755.14 and $89.95 (third principal payment) in the second month and so on until you have paid the loan off in half the time.
By doing it this way you do not need to pay interest on the principle amount for the next month.
You will need to get an amortisation schedule from your lender to do this strategy.
Method Two – Make Fortnightly Instead of Monthly Payments
You can reduce your mortgage on a standard 30 year term loan by 8 years just by changing from paying monthly to paying fortnightly. By paying fortnightly you make 26 payments per year instead of 12 payments. If you pay fortnightly this means that you make the equivalent of 13 monthly payments per year. You pay more principle each year and you also pay less interest because the interest is only accumulated over two weeks before a payment is made, instead of over one month. Your principle amount reduces much quicker so you waste less money on interest.
If you have a $300,000 loan at 8% interest on a 30 year loan term you would save over $154,000 and 8 years over the term of the loan.
Note: Your bank or financial institution will not volunteer this information. You will need to specifically ask to make fortnightly payments. Make sure your lender will accept fortnightly payments and will calculate the loan interest based on fortnightly payments.
Method Three - Use Line of Credit or Revolving Credit Facility and Credit Card
What is a line of credit or revolving credit?
A line of credit also referred to as revolving credit is a loan that has a pre-determined limit. If your house is worth $300,000 you may have a credit line with a credit limit of $260,000 secured against your house. Your current mortgage may be $240,000 of this, this means that you have $20,000 that you can draw on and use at any time.
The $20,000 is available immediately and you only pay interest on what you actually use. Many savvy investors leave this money in a line of credit account as an emergency reserve fund, just in case they need money in a hurry.
How it Works
You set up your salary to be automatically paid into this account. During the month you pay all your living expenses using the credit card. At the end of the cards interest free period (generally 30-55 days) you use the line of credit to pay off your credit card in full.
The advantage of the line of credit is that by putting all your salary into the loan account and using the credit card for expenses and delaying paying this as long as possible you will have less principle owing over that time period and you will pay less interest. In addition all of your savings are in this account and are actively reducing your loan amount. You are increasing your home loan payments by putting in every spare dollar. How you manage your money is how you save money.
This strategy works best for people who have a large surplus every month. The larger the difference between amount put into the account and the expenses drawn out the faster the loan principle will be paid off.
Make sure you get your credit card automatically paid at the end of each interest free period so you don’t forget. Never spend more money than you have put in there. Remember that you are 30-55 days behind on payment of your expenses, so make sure you have a cash buffer to pay this if something unexpected comes up.
Warning! Do not use if you do not have good savings habits. You must be able to set and keep to your budget. There is a huge temptation to take out more money each month than you put in. It is very easy to do this. You must be very disciplined as it is very easy to get access to this money. Do not get a line of credit if you are impulsive with your spending or get accumulate credit card debt.