Lump sum payments can cut your mortgage in half
A lump sum payment is when you make a ‘lump sum’, e.g. using some extra money you may have to make an additional payment towards your home loan debt.
For instance, should you out of nowhere run into an extra $1000, you may decide to put that towards your mortgage to help you get ahead on your repayments and try and minimize your debt.
But how do lump sum payments really help you?
Well the answer to this is twofold. Making a lump sum payment towards your home loan means you reduce the amount you owe and in turn reduce the amount of time it will take you to pay it off. These two facets help you by reducing the amount of interest payable on your home loan.
Remember, interest is your enemy and what you should aim to reduce/avoid!
So, tell me how I can save big money by making lump sum payments!
Well using the logic above, it means that with every lump sum repayment you make, you not only reduce the time of your loan but you also reduce the amount to pay back and in turn the interest you will have to pay.
Interest on home loans tend to be calculated daily, so every dollar that is not on your loan each day makes a different to how much interest you will be charged.
An example of saving money by making a lump sum repayment
If I have a home loan of $500,000 at an interest rate of 7% for 25 years. You are 5 years into the loan and you decide to make a lump sum repayment of $10,000 you received from your Great Great Aunt who you never knew you had.
Using the $10,000 as your lump sum payment and adding it to your mortgage will provide the following benefit;
- You will reduce your mortgage length by 11 months
- You will save $29,212.06 in interest.
Why lump sum repayments are very very clever
They are clever because a small investment now makes a huge dent to the overall scheme of your mortgage. Even if you add $100 instead of $10,000 to the above scenario you will reduce the interest you pay by $300 – not bad!
Ideas on sourcing lump sum repayments
So now that you understand lump sum repayments for your mortgage, I bet you want to source some extra money to use!
Here are a few ideas for finding extra money to add to your lump sum payment:
- Find some night/part time work
- Use your tax return
- Cutting back on your everyday living expenses
- Creating a budget spreadsheet to find ways to stop spending
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