If you have ever taken a loan out, you know the meaning of the word interest. Many home buyers put their mortgage on a thirty year plan and end up paying not only the principal or original loan amount, but more that double in interest.
Borrowing money can be a frustrating thing, and since most of us can’t pay cash for cars and houses, we get to borrow. There are ways to avoid paying as much interest as originally planned, and its quite simple to carry it out.
The first key to paying off your loan principal is understanding interest. If you have ever looked at a loan calender, or an amortization chart, you know that you pay much more interest than principal at the beginning of the loan, than at the end.
Let’s say you have recently taken out a mortgage loan and you’ve been making payments for a few months now and you get a nice work bonus of $500. You can either blow the money on a shopping spree or put it towards the principal of your new home loan.
If you decide to pay an extra $500 on your house payment, it will go directly to the principal amount of the loan. Therefore you will avoid paying interest on that $500 for the next twenty nine and a half years. This will also bump your interest to principal ratio on your side.
You may have heard of making bi-weekly loan payments. Generally people make a loan payment once each month, or twelve payments over the course of the year. When you make payments bi-weekly, you will end up paying thirteen payments over at the end of each year.
That extra payment won’t seem like much as you are paying just a little bit more each month. If you lender does not offer a bi-weekly loan program, you cannot just send in your half payments every other week and call it good, this won’t be accepted.
You can simply make an extra payment each year or you can divide your monthly payment amount by twelve and pay that much extra each month of the year. Either way is similar to a bi-weekly payment program.
The result of making just one extra loan payment each year is more than you might think. If you make that extra payment each year, you will be able to pay off your thirty year mortgage loan in just twenty four years instead, a dramatic difference.
If you are just taking out a loan, whether it be for a house, a car, or another reason, you should consider making a down payment. Some lenders even require borrowers to make a down payment up front.
If you find yourself taking out multiple small loans for personal uses, you might consider opening a savings account. Try saving your money to remodel your kitchen instead of borrowing. You can avoid paying interest altogether by not having to borrow money from a lender, but by using your personal savings account instead.