One of the important considerations, before you buy a house, is how you will pay your home loan. A house is the most expensive purchase that most of us will ever make in our life. While saving up for it will keep you from debt, it is not always the most practical way to own a home. Most of the time, you will save more money if you borrow money to buy a home.
Think of it this way. The only option for non-homeowners is to rent a place for them to live. Renting a house in Boston, for instance, will cost you $2,000 to $2,500 a month. That is $24,000 to $30,000 a year. This amount will go to your landlord. If you can afford to pay $2,500 a month, you can afford to borrow $400,000. When you buy a house using a mortgage, the $2,500 that you will pay each month will go to your equity. The more you pay, the higher equity you will own in your house. That means the money you are paying each month is not making anyone else rich – only yourself.
This is the reason why most homeowners opt to borrow money in order buy their first home. According to the data from FederalReserve.gov, the total mortgage balance as of Q2 of 2015 is $13.58 trillion. Most of these are borrowed to buy family residences ($9.9 trillion).
Of course, buying a house entails a lot of preparation. After all, you want to be financially secure after finally owning a property. But here’s the thing, as long as you haven’t finished paying off your mortgage, it is hard to say that you have financial security. Any time that your finances are compromised, you can lose your house. If you fail to complete the payments, the mortgage lender can take your home away from you.
The thing is, it takes a really long time to pay your home loan. The usual payment term that homeowners apply for is 30 years. While it will make your monthly payments lower, it will also increase the interest amount that you have to pay. And let us talk about the long years that you have to pay off your house. When you borrow the home loan, you may have a stable job. But remember that a lot can happen in 30 years. You can lose your job. Or you can become too ill to continue working. How you will you pay off your mortgage then?
Tips to finish paying off your mortgage in a few years
The only solution that will really benefit you is to pay your home loan fast. Since the future is uncertain, there is no way that you can be sure how stable your job will be after a few years. The faster you can finish your mortgage payments, the more secure you will be that your home will be your for a very long time.
Some people may think that paying your loans in a few years is impossible. Believe it or not, it is possible. In fact, one man was able to pay his $255,000 mortgage in three years!
An article on CBC.ca tells the story of Sean Cooper, a Canadian who did what others thought was impossible. He bought his house through a home loan and he completely paid it off in 3 three years and two months. That means at the age of 30, he already owns 100% of his home’s equity.
In 2012, he bought a house that cost $425,000. Although it is not stated in the article, we are assuming that he paid $170,000 as down payment. That is 40% of the selling price. It left him with $255,000 to pay off in 30 years.
The thing is, the huge debt and carrying it over a long payment plan made Cooper very uncomfortable. He knew that a lot can happen over that time. He remembered how his mother struggled with her mortgage when she lost her job in the early 2000s. She was a single mother who did not have an alternate source of income. They almost lost their home because of that. When Cooper bought his home, he was sure that he did not want to go through the same stress that his mother went through.
What he did to get rid of his mortgage was honestly a bit extreme for most people. First of all, he only lived in the basement apartment of his house. The rest of the house was rented out for additional income. He also worked three jobs – which made him work 100 hours week. He was a pension analyst during the day and he also worked part-time as a clerk in a grocery store. Whatever free time he had was spent working as a freelance financial writer.
Cooper admits that what he did was not possible for some people – especially those who have families. However, his story proves that if you have the determination, it is possible for you to get rid of a $255,000 mortgage in a little more than 3 years.
Taking cues from Cooper’s story, here are the tips that you need to follow in order to pay your home loan fast and easy.
- Choose the right type of house. Let us start by choosing the right type of house. Choose a house that suits your needs perfectly. Do not buy a house that is too big. You should also think about your future. If you have plans of growing your family, consider that when you buy a house – but do not go overboard in choosing a house that will be too big. Remember that a smaller house would mean lesser costs and that will lower the mortgage that you have to borrow.
- Pay the biggest down payment you can afford. Although it was not stated, we are assuming that a big down payment was made by Cooper. If you have a big amount saved up, you may want to pay it towards the down payment of the house so you do not have to borrow a lot.
- Make your house earn an income. If you want the property to earn you income while allowing you to live in it, select a house that has a basement or garage that you can convert into a smaller unit. You can then live in the main house and rent out the garage or basement to someone else. Or you can do what Cooper did, live in the smaller unit and have the main house rented for a bigger income.
- Live a frugal lifestyle. If you want to maximize your mortgage payments, you may want to pursue a frugal lifestyle. This does not mean you should be a cheapskate. You simply choose your priority expenses and you stick to it. You will try to avoid the expenses that you know is not necessary for you to survive. Cooper had to skip vacations and night out with friends so he could save money for this mortgage payments.
- Do not take on more debt. If you have to pay your home loan, that means you already have a huge credit balance to take care of. Try not to take on more debt by using your credit cards or getting a car loan. If you are bent on paying your home loan is a short time, the other loans that you need may be set aside for a couple of years.
- Get a side job. Obviously, you need to increase your income if you want to boost your mortgage contributions. Think about what you can do on the side that will not cost you money to set up. If you can write, you can probably be a freelance writer as well.
Benefits of paying your housing loan fast
According to the data from Census.gov, only 36% of homeowners are mortgage-free. 64% are still paying off their home equity mortgage. Obviously, the common practice for homeowners is to pay their mortgage for a long time. Maybe a lot of them are not willing to go through all the sacrifices that are needed to pay the loan faster. If you think that going through all the effort and sacrifices is not worth it, think again. To pay your home loan fast will bring you a lot of benefits.
Here are some of them.
Save on interest.
The most common benefit is saving on your interest. Let us assume that you plan on borrowing $300,000 to buy a $360,000 house. The interest is 4%. You paid the 20% down payment so you are not required to pay a Private Mortgage Insurance. Your monthly payment over a 30-year mortgage will be $1,432.25. That means you will be paying $215,607.18 worth of interest over the course of the 30-year mortgage term. Let us say you can add $1,000 on your monthly payments to make it $2,432.25. This amount will help you save $128,548.91 on interest. Your payment term will be shortened to 160 months instead of 360. Instead of paying your mortgage for 30 years, it will only take you over 13 years to completely pay your home loan. If you can add more than $1,000, the savings will be greater.
Gives you peace of mind.
Another benefit of paying your home loan fast is peace of mind. You do not have to worry about future events that can compromise your home loan payments. You only have to deal with the stress that comes with having a huge amount of debt to deal with for a short time.
Increases your net worth immediately.
Once you have paid off your loan completely, you will not own the 100% equity of your house. That will increase the value of your assets and your net worth. Not only that, as the value of your property increases, so will the worth of your personal finances. Although the monetary amount is not the only way for you to achieve financial security, it is a great way for you to start in making your finances stable. Eventually, it could even help you achieve financial independence.
Allows you to tap into an asset for investment purposes.
Finally, to pay your home loan fast means you will have the assets to pull out for investment purposes. You can use it to borrow more money for a mortgage so you can buy rental properties. Investing in real estate is much more reliable compared to stock investments. People cannot utilize is because it is too expensive. But if you can completely pay off your first home loan fast, you can afford to grow your real estate properties and have them rented out. That can provide you with a lot of income sources. If you play your cards right, you may be able to retire early and live off your rental income.