No one wants to pay all of the interest we are forced to pay on loans, credit cards or mortgages, yet we make the monthly installment payments each month religiously to pay off our debts and protect our credit records. Have you ever looked at just how much interest you pay? Over the life of a 25 year mortgage you can and will literally pay thousands and thousands of dollars. Aside from winning the lottery, what is a guy supposed to do? Well there are a number of possible alternatives that can help you pay less interest and even pay off your loan, mortgage etc even more quickly than one would think.
Of course each person will need to evaluate their personal situation in terms of the amount of money owed , whether it is a loan, a credit card or a mortgage and just how much money you can afford to pay in addition to what you are paying already. Even a little bit extra can make a big difference to the overall total amount of interest you pay and how long it will take you to fully repay your debt. Essentially it means changing your installment payment frequency and there are a number of ways to accomplish this.
Make an Extra Installment Payment
Most loans and mortgages, certainly credit cards allow you to make an extra payment in addition to your regular installment payments. Any extra payment goes directly to reducing your principal. In turn the amount of interest that is calculated immediately becomes less, meaning that on your next installment payment, which remains the same total amount, more money is going towards reducing your principle. The net result is that you can pay off a loan or mortgage more quickly since you have reduced the principal more quickly than originally planned.
Change from Monthly to Bi-weekly
Most people will make an installment payment once per month on their mortgage, car loan or any other type of loan. If you were to change from once per month to once every two weeks, you are making in effect an extra monthly payment. So if you were paying $ 500 / month for a total of $6000 per year and then switch to $250 bi-weekly, your total annual payment jumps to $65oo or an extra months payment. This has an immediate impact of interest reduction and more going towards principal reduction. Over a 25 year mortgage, you can reduce the number of years you pay for your mortgage dramatically all by just changing the installment payment frequency.
20 + 20 Peograms
Some financial institutions will allow their customers to increase their monthly installment payments by 20% each year. In addition once per year these same customers can pay 20% of the original mortgage once per year. Combined you can make a significant contribution to your mortgage and knock years as well as thousands of dollars in interest off your mortgage.
Pay 10% Extra Each Year
Some people receive a bonus at the end of each year from their companies or they have some extra money left over from their budget. If you were to take this money and put it towards your loan or mortgage, again you can take years off your mortgage and months off a 5 year loan. Some companies have a provision in their mortgage documents which limits this sort of payment to 10% of the original balance. Some will go as high as even 20%, although most people would have a difficult time coming up with this much money. Sometimes an inheritance can be used in this manner to have dramatic effects in terms of paying the mortgage off and reducing the interest you pay.
Pay 10% Extra Each Time the Interest is Recalculated
Most mortgages have a 25 year term, however the interest rate will be fixed for a specified period from one to five years depending on what you chose the last time you renewed the interest rate. Each time you renew the interest rate, customers have an opportunity to repay all or a portion of the loan or mortgage depending on the agreement you have with your financial institution. This is an excellent time to pay a portion of your mortgage down and eliminate or reduce the amount of interest that you pay. Keep the monthly installment payments at the same level even if the interest rate drops. More money will go towards reducing the principal and paying off the loan or mortgage more quickly.
Take Advantage of an Open Floating Rate Mortgage
Open mortgages or variable rate mortgage interest rates float with the prevailing bank rate and commercial interest rates. These are published on a regular basis by the banks. During times of volatile economic climate, the interest rate can go up and down a lot, making a variable rate interest rate mortgage tough to handle sometimes. During quiet economic times the rate stays much the same from one year to the next making it easy for people to meet their obligations.
The big advantage of an open floating rate mortgage is that you can pay any amount any time towards the principal. Your installment payment frequency is pretty flexible. You must of course pay the accrued interest each month as a minimum. If your cash flow is such that one month you have a large income, you can pay it towards the open mortgage, while other months when times are tight you might only pay the accrued interest. While variable mortgages have their advantages, consumers need to be reminded that this takes some discipline to manage and not spend your extra funds on other non interest savings areas. Before you know it the money is gone and you are still paying the same monthly installment payments.
Just by changing your installment payment frequency in some manner similar to those ideas we have mentioned above, you can significantly affect the amount of interest you pay and reduce the number of years it takes to pay off your mortgage or loan. Even a little bit each year can make a big difference!
Disclaimer: The views expressed by this author don't necessarily reflect the opinions of Lazerloan.com, it's owners, or it's affliates.
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