The bank calculates how much you must pay monthly over the specified period of time for your debt to be completely paid off.
Many times, this period of time is quite lengthy and a lot of people don’t want to have to be in debt that long. This explains why people are constantly looking for information on how to pay off your mortgage fast, or a mortgage payoff trick to help them pay off mortgage faster.
If you adhere to the ground rules and are faithful to the terms of the mortgage, you will pay off your mortgage eventually but not fast enough.
If what you really want is how to pay off your mortgage fast, then you must understand how the whole system of mortgage payment works.
How do mortgage payments work?
For the sake of this example, let’s assume that you took out a $300,000 dollars fixed-rate mortgage with 4% interest over a 30 year period.
For the mortgage payment, two components are involved: the principal and the interest.
The bank calculates how much you must pay every month to ensure that at the end of the stipulated 30-year period, you owe nothing.
The monthly payment does not change. Even if you decide to pay more each month, it doesn’t exactly mean you’re reducing the amount of money you have to pay. What is going to change is the amount that goes towards principal and interest.
The amount that goes to interest is a direct mathematical calculation.
For the first month, 4% of $300,000 is $12,000 yearly. Dividing this by 12 (number of months in a year) will give you $1000.
So, for the first month, you owe a thousand dollars interest and this is the most that you’re going to owe because your payment in this scenario is $1,432.
So, while 432 dollars goes to your debt principal to reduce your debt amount, $1,000 goes to your interest.
This same calculation is done all the way through.
For the second month, the rest of the money you owe ($299,568) will be multiplied by 4% and divided by 12 (months in a year) and the result is your interest payment for month 2. The amount above that will reduce the principal.
So your monthly interest payment remains the same but the amount you pay towards principal will go up.
So if you decide that you do not want to pay the bank as much interest anymore or that you want to pay off mortgage faster, all you have to do is owe them less money.
The key steps to pay off mortgage faster
If you can successfully decrease the principal, the interest goes down too. This way, you also get to pay off mortgage faster.
The fastest way to pay off mortgage is by making extra payments early to lower your principal, while the most brilliant way to pay off your mortgage is by seeking knowledge from the right sources. You must also understand the terms of your mortgage as well because just assuming that it is a certain way can lead you to make a grave mistake.
For instance, if your lender put a prepayment penalty on your loan, then the mortgage payoff trick we mentioned above – making extra early payments – does not apply to you.
Although many lenders do not have a prepayment penalty, it is important for you to be sure that your lender is included to avoid unnecessary charges for paying your mortgage off too early (yes, those exist too). You can confirm by calling your lender to find out.
Once you have cleared up that question and you know that it is safe for you to make early payments, ensure that you let your lender know that when you make extra payments, you want it applied to the principal amount and not your interest. Then you can use the mortgage payoff trick.
This is just about the most brilliant way to pay off your mortgage early.
A few other ways to pay off your mortgage quickly include:
- Choosing to make an extra monthly payment each year.
- Contacting your lender to change your loan to 15 years from 30 years.
- Changing from monthly payments to bi-weekly payments.
Each of these options have advantages and disadvantages, thus, they must be applied based on your own unique situation.
Remember, although it is great to look for creative solutions regarding how to pay off your mortgage fast, do not do it at the expense of other things like your standard of living and medical needs.
Ensure that you are in a good place financially before setting out to pay off mortgage faster.