Taking a loan has become all the easier these days. Banks are more than eager to give loans to customers. This trend has satisfied the needs and wants of people, as buying any property or commodity has become achievable. Gone are the days when people used to wait for retirement to build a home or purchase other expensive things. Today, banks give out loans to buy various products, from furniture to real estate.
Who can make extra mortgage payments?
Loans come with their fair share of baggage. One pays extra in the form of interest upon taking a loan. But what if there is a way to curtail this additional payment to a large extent? Well, this can be done by making extra mortgage payments. This little trick in the book can always be helpful for people who have taken loans.
But this trick is not for everyone. If you have extra room in your budget or excessive money, this trick is indeed for you. Such people can always use this money to pay off the principal amount of the loan, thus saving on interest.
Advantages of making extra mortgage payments
One can save a lot of money through extra mortgage payments. Additional mortgage payments refer to sending extra money to the lender. Let us dive into exploring its benefits in depth.
1. Reduces interest rates
The interest rate on the loan is levied on the total principal amount. So, if one ends up paying off the principal amount, the interest rate will also come down simultaneously, thus saving loads. This trick can be used by people who have surplus cash. They can always use this money to pay off their loans.
2. Loan repayment ahead of schedule
Another excellent benefit of making extra mortgage payments is that it helps reduce the loan duration. It is thus always wise to use one’s extra money to pay off loans. The period over which a person is supposed to pay off the loan gets reduced, thus taking away the burden of loan repayment sooner than later.
3. Reduces debt
Paying off the principal amount does not just saves money on the interest rate but also offers flexibility. The duration of the loan lessens, and so does the debt, giving a person room to do anything right, from starting a business to retiring. One does not have to worry about regular monthly payments too. Paying off debts gives one the freedom to explore several areas in life.
Other ways of catering to extra cash
Any person who has taken a loan consistently has this thing on their mind to pay it off as soon as possible. So, in case of having an extra cash reserve, the loan taker always thinks of paying off the loan as quickly as possible. But there are other ways too of catering to spare cash. While paying off debts is a good idea, let us explore the different forms of using one’s extra cash reserve.
Following are some other ways of dealing with extra cash:
1. Curate an emergency fund
If paying off a given loan is your utmost priority, it is always wise to put that extra money into paying off the loan. But, if you have other preferences, such as having a given cash reserve ready for use, it is always wise to put that cash aside. In the case of a cash emergency, taking money out of a home loan is very difficult. In such as case, one needs to take a home equity loan which takes a lot of time to process. So, gauge your priorities and then jump into paying off a loan with that extra cash in your reserve.
Having an emergency fund is very important, no matter what. Most people do not give much emphasis on saving money. Money held today can work wonders for you tomorrow. We never know what can or cannot touch us in the future. It is thus always wise to keep some money aside in an emergency.
While paying off a loan is good, having a handy cash reserve is also always advisable. One must choose a plan of one’s liking for saving this money. Do not keep your money at home. Instead, invest it in the market or use a fixed deposit fund. Choose the best possible option for safeguarding your money, thus ensuring that your money grows. Every person should have an emergency fund to secure their life.
2. High-interest debt
Suppose you have some extra money and have taken two loans. So, you can always look forward to paying off cash from the loan whose interest rate is higher. It is advisable to get out of a loan with toxic interest rates.
High-interest debt can make huge holes in your pocket. So, paying off these loan types should always be one’s priority. A person ends up paying a lot of extra money through interest. Thus, use your additional cash reserve meticulously, and use it to get out of high-interest debts.
3. Opt for 15-year mortgages
When taking a loan, one has various options to decide on the duration of paying off the loan. Mainly, the 30-year mortgage period is popularized, do consider the other options as well. There can be instances wherein your agent insists on the 30-year mortgage period.
So beware of such cases and ask for a 15-year mortgage period to pay off your loan. A shorter loan period ensures less money is paid in interest, thus saving a considerable sum of money on the overall loan amount. So, opt for a 15-year mortgage period when taking a loan.
4. Saving for other goals
Loan repayment is not the only goal of a person. There are several other responsibilities that any given person needs to cater to. This can include saving money for education, healthcare, or investing in the market. Putting money on the market often brings remarkable results when sponsored for a long time.
So, one can opt for investing money for a longer time in the market. So, make sure you sort your priorities when dealing with an extra cash reserve. This can vary from person to person. Do invest in the other goals of your life, as they also need your attention.
How to make extra mortgage payments?
After getting informed about the benefits of extra mortgage payments, the next question that pops into one’s head is how to make these payments. What are the various strategies or approaches that go into it? Before going to your respective bank or agent, being well-informed about this element is vital. So, there are two strategies for making extra mortgage payments:
• Biweekly payments
As the name suggests, biweekly payments can be made every two weeks. So, one is supposed to pay the mortgage every 14 days. So, over a year, one ends up making 26 biweekly payments. This figure totals the amount paid in 13 months of expenses.
So this means that one ends up paying for one extra month. This additional payment goes towards reducing the principal amount of the loan. Thus, in this way, one can save money on the overall interest rate. Biweekly payments are indeed a meticulous approach for catering to extra mortgage payments for a given loan amount.
• Extra monthly payments
Another way of making extra mortgage payments involves paying a certain additional amount and the designated monthly interest amount. These other payments are made every month a year, which adds up to a reasonable sum of extra money paid directly to reduce the principal loan amount.
So, one must decide on the best fit extra mortgage loan repayment strategy according to one’s needs. Both methods will prove to be beneficial and reduce the principal loan amount.
Thus, this read enlightens one about the benefits of making extra mortgage payments. This trick can bring down the money spent by a person as the loan interest amount to an all-time low. One needs to make some meticulous choices when taking a loan. By following the above-mentioned steps, one can save loads upon taking a loan. Also, deciding on the best strategy for loan repayment should be emphasized. These measures are a part of financial planning.
This article emphasizes the importance of putting your extra money on a loan and other ways of using that money. So, follow these steps and take the reins when managing your own money.