When you think of the word “home loan”, the image that probably comes to your mind is living above your means and repayment woes. But a loan doesn’t have to be something you can’t afford; it can also be an opportunity for you to own your home sooner, rather than later. With the right amount of planning and budgeting, you could pay off your mortgage early and save thousands in interest charges over the life of the loan.
Did you know that lenders encourage homeowners to pay off their mortgages early? As long as you can show that you have the financial ability to do so, most lenders will support you in repaying your loan sooner rather than later. That being said, the average home loan term is almost 20-year long. But you can easily pay off the home loan earlier than the standard period and save money and accelerate your financial independence.
Whether you’re planning for retirement or simply trying to get out from under that monthly payment, there are a variety of ways you can pay off your home loan sooner than expected without incurring penalties in some cases. One or more of the following five changes to your payment plan can help.
Increase Your Monthly Payments
Depending on the type of loan you have, you might be able to increase your monthly payments even if you can’t refinance. This approach works best for a fixed-rate loan and is a good option if you don’t have the cash flow to refinance your loan. Most mortgage providers will accept an additional payment per month but make sure to speak with your lender to see if they accept prepayments and how much they charge.
But still, this remains the most effective way of paying off as when you increase your monthly payments, you will be able to pay off the loan sooner and save a lot of money in interest charges over time. And the sooner your loan is paid off, the less interest you’ll end up paying.
Even if you don’t have any options to refinance your loan, increasing your monthly payments can be a great way to put extra money towards your loan. There are a few different strategies you can use to increase your payments: pay an extra lump sum to your loan. This way, you’ll still be paying off your loan just faster than you originally planned.
Start paying an extra amount every month. This is a good option if you want to keep your payments constant. Just be sure to include the extra amount in your budget so you don’t forget about it.
Balance Transfers as a Way to Pay Off Your Mortgage Early?
The interest rate on a home loan is always a concern for borrowers because a home loan generally involves a large sum of money. Therefore, if you are unable to make payments on your mortgage, discuss your options with your lender. They may be able to help you offer you a better deal and reduce the interest rate, however, if not, there is always an option of transferring the balance to the new bank.
Low interest rate is a good sign for shifting the home loan to a new lender. In general, most interest rates have a floating basis, which means they are linked to macroeconomic factors. So, whenever there is a downfall in the economy, it is natural to be tempted to shift to a lender who is offering you a better interest rate. For instance, even a drop of 0.5% in interest rates can have a significant impact on the overall interest costs of a home loan.
Let’s understand this by an example:
Priya takes up a home loan of INR 50 lakh at an interest rate of 8.5% with a payment term of 20 years. Her monthly EMIs will be INR 43,391 and the total interest outgo will be INR 54 lakh. After three years she decides to lower her EMIs by transferring her home loan to a new lender who is offering her an interest rate of 7.6%. The outstanding balance is INR 47 lakh approximately and the remaining payment term is 17 years. This means her new monthly EMIs will be INR 38,151 and the total interest outgo will be INR 44 lakh. This means when her interest is lowered even by 0.9%, she still saves INR 10 lakh in all.
With the help of this example, it’s easy to understand that transferring your home loan to another lender can help you save money on interest and pay off your mortgage early. However, everything comes with its pros and cons, hence be sure to compare the interest rates, fees, and features of each loan to find the best deal for you. There are a few things to keep in mind if you’re considering a balance transfer.
- You’ll need to make sure that your new lender offers this type of loan.
- You’ll need to find out if there are any fees associated with the balance transfer.
- You’ll need to make sure that you can still afford your monthly mortgage payments after the transfer.
Shortening the Loan Term
You can shorten your home loan by paying off the loan in full with a lump sum payment. This could work well if you have some extra cash and don’t need it for a long period. You can also do this if you don’t have the cash flow to make additional monthly payments. Before you pay off your loan in full, be sure to talk to your lender to make sure you’re not violating the terms of your loan. As it sounds counterintuitive it essentially means increasing the monthly payment.
Paying extra each month will reduce the length of the loan. There are two ways to shorten the term of your loan. Refinance your loan (with a new 15-year mortgage) and make monthly payments: This option is ideal if you have the cash flow to handle a larger payment each month. If so, you can reduce the length of the loan by making monthly payments instead of bi-weekly payments.
But there are a few things to consider before you make this decision. First, you’ll need to make sure that you can afford the higher monthly payments that come with a shorter loan term. Second, you’ll also need to factor in any prepayment penalties that may be associated with your mortgage. If you’re confident that you can afford the higher payments and you’re comfortable with the potential penalties, then shorter loan terms can be a great way to save money and pay off your mortgage early. The key is to make sure that you’re prepared for the higher payments.
Make an Extra Lump Sum Payment
A home loan is a huge investment that requires a lot of money. It is not uncommon for people to have trouble making monthly payments because of their low income. In such cases, it might be tempting to make an extra lump sum payment and close off the home loan early.
A lump sum payment is a one-time, up-front payment that can help you to close off your mortgage early and a way to save money on interest and pay off your mortgage sooner. However, this can be a very costly decision if you are not aware of the penalties involved in doing so.
But still for many, lumpsum is the most convenient way to shorten the term. The way to do this is to choose an option that will decrease the loans and free up funds for other key items such as children’s education, vehicle lease payments, or saving for retirement. Some even set aside enough for the end-of-term goal such as putting together holiday money or saving up large amounts of savings.
Consolidation: Merge Multiple Loans into One
If you’re paying off multiple loans, you might be able to shorten the loan term—and pay off your mortgage sooner. If you have multiple mortgages, you can consolidate them into one loan. This can help you reduce the amount of interest you’re paying on each loan. If you have several small loans, consolidating them into one large loan could help you pay off your mortgage sooner and save money in the long run. This is a great option if you have several small loans with a high-interest rate.
Bottom Line
It’s no secret that paying off your home loan early can save you a lot of money in interest. But how do you go about doing it? There are a few different strategies you can use to pay off your home loan early. The most popular method is to make extra repayments. This involves making payments on top of your regular repayments, which will go towards paying off the principal of your loan.
Another option is to make lump sum payments. This means making a larger payment than usual, which can be used to pay off a chunk of the loan. This can be a great option if you come into some extra money, such as a bonus at work. Finally, you can refinance your loan to a shorter term. This will lower your monthly repayments, but you’ll pay off the loan sooner. This is a great option if you can get a lower interest rate.
Whatever strategy you choose, make sure you stick to it. extra repayments, lump-sum payments, or refinancing, paying off your home loan early is a great way to save money.
