How an extra $100 could
save you $1000's
 For all those who have home loans your number one financial goal should be to pay off it off in the least amount of time. The quicker you own your home the quicker you can use it to leverage other forms of income producing investments. In other words any extra money you have should be directed toward paying down your loan.
The benefits are quite significant -
Lets say you are lucky enough to stumble across $15,000 from an inheritance. Rather than going out and spending it on a new car or a holiday the first thing you should do is pay down your credit cards and then whatever is left over put it towards your home loan.
To illustrate the power of making extra payments lets assume that you have a loan of $200,000 at 6.75% over a 25 year period and you are making fortnightly payments. If you make a lump sum payment of say $10,000 onto your loan when you are 10 years into the loan period, you'll save $16,089 and own your home one year and six months earlier.
The equation gets better the earlier in the home loan period you make your lump sum payment. For example on the same loan, if you paid $10,000 into the loan after just five years you'd save $25,815 and own your home two years and one month earlier.
Now your $10,000 is worth two and a half times. But wait it gets even better - if, after two years of your home loan, you deposit $10,000 into the loan account, you save $33,173 in interest and pay your home off two years and seven months earlier. In other words the $10,000 now has a value of three times.
As you can see you should use any windfalls that come your way.
Let the numbers work for you -
The way all this works is quite simple. The interest you pay on the mortgage is calculated on the principal component of the loan, or what is known as the daily loan balance.
Therefore if this daily loan balance takes a tumble thanks to a lump sum, then interest can't accumulate so quickly, and as long as you keep paying at the lender's set minimum rate, you pay off the loan much faster.
The only thing to watch out for here is whether you have a home loan that allows you to add lump sums or make extra payments. Some loans especially fixed and many special rate or honeymoon rate deals don't allow you to do this so be very careful when you are selecting a loan.
The low interest rate may sound appealing in the first instance however the real deal is the ability to pay off your loan as fast as you can without incurring charges. Spend some time discussing these issues with your financial institution or mortgage broker when you're selecting a home loan.
Pay a little extra and save thousands
If you don't have a lump sum coming your way but are able to fine tune your budget and find extra money per month or in fact get a pay rise (and your credit cards are under control) then you should put as much as you to increase your regular repayment.
To show you the benefits of this lets again assume that you have a $200,000 loan with an interest rate of 6.75%, for 25 years and you are 2.5 years into your loan. Your minimum monthly payments will be $1,381 per month.
If you added say $100 each month to your monthly repayment you will save a whopping $29,694 in interest and pay off your home three years and two months earlier.
If you can increase that extra payment to $200 per month, you will save an enormous $50, 487 in interest and own your home five years and six months earlier.
Just like paying a lump sum you can save many thousands of dollars if you increase the amount you pay for your regular repayments. Therefore the quicker you pay down your home loan (especially in the earlier stages) the more money you will have to use to either invest in other income producing assets like shares or an investment property or even a well earned holiday.
To do some calculations of your own simply visit Bank Choice and go to their calculator section.
This article is courtesy of Greg Smith of Lifestyle Money |