Choosing the Right Payment Method for Your Mortgage
Nothing is more satisfying than finally owning a new home. However, it doesn’t come easy. This is mostly because homes do not come cheap. The good thing is that with the many banks and other types of lenders in business today, getting a home loan is no longer as hard as it used to be. In most cases, to get mortgage financing, all you need to do is save up a considerable amount of money that will be used as down payment and also keep your credit report neat. But when choosing a mortgage loan, it is important to understand how payment works, how much you’re expected to pay monthly, and within how long you can expect to clear the loan. This makes it important to understand the various types of mortgages based on the terms of payment, as well as get some tips on the various payment methods you can use to clear your mortgage faster.
Starting with the various kinds of mortgages available, here are some tips and hacks on choosing the right payment method for your mortgage.
3 Most Common Types Of Mortgages
There are 3 most common types of mortgages based on the interest rates and payment structure. These include fixed rate, adjustable rate, and interest-only mortgages, which are discussed below briefly.
If you guessed right, the term fixed-rate implies that the interest remains constant throughout the term of your loan. The good thing about this one is that your interest amount will not go up unexpectedly in the future. However, in the event that there are changes in the real estate and finance markets and loan interests go down, you may end up losing out. Nonetheless, you always have the option of refinancing your mortgage (which will be discussed below later) to take advantage of the lower interest rates.
Adjustable Rate Mortgage
ARM or adjustable rate mortgage is another option you may want to pick from. Unlike the previous one where the interest rate is constant, this one is capped to the economic index. In this case, your mortgage payments may increase or decrease later on at some point in the loan duration. It also means that if you choose this option, maybe because of a lower initial interest rate, you will need to be flexible with your budget and finances.
This is another common mortgage option that a lot of home buyers go for. When you take the loan, you’re only required to pay only the interest for a defined period, say 5 to 7 years, after which three things can occur:
- Pay a lump sum to clear your loan
- Start making payments to clear the principal
- Refinance your home
The biggest catch with this option is that once the interest-only period expires, your mortgage payments may significantly skyrocket. This can end up putting you in a tight spot and refinancing your home within such a short time may not always get you the best deal out there.
With that in mind, let’s take a look at some of the various ways you can pay your home loan, perhaps even to clear it faster and improve your financial freedom.
Tips on paying your mortgage
1. Increase your monthly payments
Assuming that you make your mortgage payments monthly, adding as little as $50 on top of the amount you pay can make a huge difference by the end of the year or several. By increasing your monthly payments with 50 bucks, not only will you be able clear the loan earlier by about 3 or so years (for a 30-year mortgage), you will also save quite a substantial amount of money in interest. However, this will require some solid dedication if at all you’re going to reap the benefits.
2. Switch to Biweekly payments
If you do the math right, a year has 52 weeks, as opposed to 48 (12X4) that counting based on the number of months would give. This is another method that you can utilize and end up clearing your mortgage faster without much noticing or feeling the pinch. By the end of the year, you will have paid a larger some toward clearing your debt than you would when making monthly payments.
3. Lump sum payments
Another common method that wise homeowners use to offset their mortgage faster is lump sum payments. Most lenders allow their borrowers to pay up to 20% of the principal per year without any additional fees or charges. Taking advantage of this opportunity can see you not only clear the mortgage faster, but you can also make a significant amount in savings on interest. Whether it’s a windfall or you’ve won some kind of jackpot, you may as well consider sacrificing that trip to the Bahamas and put the money into clearing your home loan.
Refinancing is unarguably one of the best ways to pay any mortgage. In most cases, the main reason behind refinancing is to get a better deal in terms of interest rate or the loan term. As a matter of fact, you can get both a better interest rate and a shorter term. With a shorter term, you will definitely pay off your loan faster, but the monthly payments may increase. This means that you will want to restructure your budget to accommodate the increased payments.
5. Invest extra payments
Last but not least, you also have another option that doesn’t involve directly increasing your monthly or annual mortgage payments. You can also choose to invest the funds you would have used to make extra payments in stocks, real estate, cryptocurrency, just to name a few channels of investments that have good returns. You could also consider investing in a rental property, which is among the most profitable areas in the real estate industry as far as investing is concerned.
However, there are a few things you would want to consider if you choose to do so. For instance, before investing in a rental property, Gene Edwin from VieFinancial.com.au says you should set aside funds to pay professionals to do the repairs the home will need. Once you get good returns from your investment, you can always use the sum to offset your mortgage, which would drastically reduce your payment term and earn you savings in interest.
And there you have it. With the above pointers, you basically have the information you need to choose an appropriate mortgage payment method. The most important thing is to ensure that you pick an option you will comfortably afford without necessarily burdening yourself too much.