Owning your own home, whether it is a house and lot or a condo, is probably one of the biggest investments you will make in your entire lifetime. It may also be your biggest asset or liability depending whether you will rent it out or reside in it. As Robert Kiyosaki says, your home is an asset if it brings money to your wallet and a liability when it drains money out of your pocket.
As most of us cannot afford to purchase real estate in cash, we usually take a mortgage in a bank or financing company and pay it off over the years. As some of you may know, I bought a pre-selling condo unit last year in DMCI, marking my first major tangible investment. Since it was a pre-selling, I’m still on the down payment stage. In 2 to 3 years’ time, during turnover, I will be looking to avail a bank’s housing loan.
Whether you’re still looking to purchase real estate or you already have done it and currently in the process of paying your mortgage off, here are some of the tips on how to save money while paying off your mortgage.
Should You Pay Your Mortgage Early?
Before you decide to pay your mortgage early, consider a few factors as you may be off better investing the extra money, especially if your home is not yet ready for occupancy and is still being built.
Compute the interest expenses that you will be incurring over the lifespan of your mortgage and think if you can get it by investing your money instead. If you have a low mortgage rate and you’re able to get a better return on an investment, it may be better to invest your extra money and pay your mortgage at the regular rate. Paper investments such as stocks can provide higher rate of return than the interest rate of your mortgage.
Some mortgage lenders charge a prepayment fee that may wipe out any benefit you get from paying your mortgage early. Find out your prepayment fee and compare it to your mortgage savings to be sure paying your mortgage early will be beneficial in the long run.
How to Pay Off Your Mortgage Early
Once you’ve weighed the pros and cons and decided that paying your mortgage early makes the most financial sense for you, the next step is to figure out how to make it happen. There are a few different strategies you can use to shave years off your mortgage repayment schedule.
Make bi-weekly mortgage payments. Making bi-weekly payments on your mortgage can shave around four years off your mortgage. Check to see if your mortgage lender has a bi-weekly payment plan and whether they charge an additional fee for the program. Every time you receive your salary, set aside first the amount allocated for your mortgage payment before you start spending.
Add a little extra to your monthly payment. Anything extra you can pay toward your mortgage will reduce the balance and speed up your repayment. Freedom Debt Relief recommends using a mortgage calculator to see what payment you’d need to make to pay off your mortgage in a shorter amount of time. Plug in your current balance, the interest rate, and your desired repayment period and the calculator will show you the payment you need to make.
Refinance into a shorter-term mortgage. You might consider refinancing your mortgage to a 5-year or 10-year fixed rate mortgage. In both cases, your repayment period will be shorter, but your monthly mortgage payment will be higher. Keeping your current mortgage may be a better choice if you’re not sure you can consistently afford the higher monthly payment. That way, you have the option, not the requirement, to make larger payments as often as you can.
Get rid of MRI. Mortgage redemption insurance is required for all housing loans in the Philippines. This gives the bank security in case you die and the mortgage is not yet fully paid.
If you have a life insurance, you can use this and make the bank the beneficiary during the life span of the mortgage. Once you finished paying off the mortgage, you can then assign it back to your original preferred beneficiaries. In this way, you can save money in paying MRI to the bank. Just take note that your sum insured in your life insurance policy is greater than your housing loan amount.
Get extra money by increasing income or reducing expenses. Coming up with the money to pay off your mortgage early isn’t always easy. You can increase your income by taking on a second job, making money from a hobby, or by working overtime or asking your employer for a raise. Or, you can look at your current spending for places that you can cut back to free up more money within your budget, according to Freedom Debt Relief. The more ways you can save money or increase your income, the more you’ll be able to put towards your mortgage.
Keep track of the progress you’re making toward repaying your mortgage. If you’re consistent with making additional payments as much as possible, you can pay your mortgage in a fraction of the time and free up the monthly mortgage payment for your other financial goals.
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