Four Rules To Pay Your Home Loan Off Faster
Buying a home is probably the most expensive purchase most of us will make in our lifetime. And most of us will need a home loan to assist with the purchase.
A home loan is generally written for a 30 year term and if you only make the minimum required payment each month, then it will take you thirty years to pay it off. But who wants a loan hanging over their head for that long? Wouldn’t it be great if you could pay it off in half the time, or even less.
Research shows that people who own their homes outright are far more financially secure in life than those with a mortgage or those who rent, particularly as you get closer to retirement age.
If you follow these four rules, you too could pay off your home loan sooner. The more aggressively you follow the rules, the sooner you could pay it off entirely.
Rule 1 – Make extra payments
Every dollar in extra payments above the minimum monthly payment, comes straight off of the principal amount owing on the loan. This also comes with the extra benefit of reducing the total amount of interest that you have to pay over the life of the loan.
With most home loans you can make extra payments at any time, not just when your regular payments are due. Even an extra few dollars per week can make a big difference.
Just beware that if you have a fixed interest loan, then you may have restrictions on extra repayments during the fixed period. A way to overcome that is a split loan, where you have some of the loan on a fixed rate and some on a variable rate.
Rule 2 – Find ways to bring in extra money
Whether it’s a side hustle, an extra shift or overtime at work, mowing the neighbour’s lawn or selling a few unwanted items around the home, everyone has the ability to bring in a few extra dollars. Of course, don’t forget your tax refund as well.
Put those extra dollars straight into your home loan as soon as you receive them and reap the benefits.
Rule 3 – Refinance to a lower rate
Do you know the current interest rate on your home loan? Do you know how it compares to what else is available in the market? For most people the answer is no.
Lenders rely on this apathy by borrowers. An old saying is ‘the longer you are with your bank, the higher your interest rate is’. Some call it a loyalty tax but really it’s just a lazy tax. The market is constantly changing and lenders are constantly tweaking their rates to attract new borrowers.
The lower your rate, the lower the interest charge on the outstanding balance of your loan, meaning you end up repaying less in total. That’s more cash in your pocket each month to either pay your loan down even sooner or to use on other things that add value to your life.
We recommend conducting a review of your home loan every two years, or if you have a change of circumstances.
Rule 4 – Stay out of debt
Avoid taking on other debt whilst you are focussing on paying off your home loan. Whenever you get tempted to buy something, ask yourself these four things; can I buy it with money I already have; think about the trade-off’s of the purchase and whether it’s worth it to you personally; ask yourself if you wanted it or needed it before you heard about it through an advertisement and finally, delay any unplanned purchase for a day or more.
Just remember, whenever you take on debt to have something now, you are potentially robbing from your future lifestyle and choices, which you may end up regretting.
Don’t be discouraged.
The hardest part will be making those initial tweaks to your lifestyle but rest assured once you get going and into the habit you may actually become addicted to it. Paying off a 30 year home loan in half the time, ten years or even five years, is an incredible feat. Finally getting the ‘mortgage monkey’ off your back and owning your home outright will be a reward worth celebrating.