For most of us, our mortgage represents the largest financial commitment in our lives. With home prices rising consistently over time, the costs of home ownership have risen considerably as well. Here are a few tips to help you save money on your mortgage and pay off your debt faster.
A popular option, especially in the last several years, is refinancing. With some of the best lending rates in history being available, you can potentially save a tremendous amount of money by refinancing your mortgage at a lower interest rate. That said, not everyone understands what this means, and how it can help.
Refinancing is essentially taking out a new loan that you use to pay off your existing mortgage’s outstanding balance. This means you no longer have your old monthly payments, but instead will be paying off a new loan with new terms. This offers two opportunities for savings. First, you can lock in a new interest rate that’s lower than your old rate, this by itself can save you thousands of dollars over the life of your loan, even if your interest rate is only dropping by half a percentage point.
The second opportunity for saving is that you can renegotiate the term of your loan. If you can afford larger payments, you might consider a shorter term than your original loan. If, however, you’d benefit from lower payments, you can extend the time you have to repay your loan. Often homeowners will refinance after 5 to 10 years and negotiate a new 30-year loan, leading to lower monthly mortgage payments.
Make an Extra Payment
If it’s an option for you, making one or two extra payments a year will significantly reduce the total cost of your loan. This can both reduce the term of your mortgage and reduce the total amount you have to pay on your mortgage at interest is calculated based on the total owed, rather than the principal amount of the loan. On a 30 year loan, two extra payments a year can result in paying the loan off several years early, meaning you get out of debt faster. This can also be a helpful tactic in your first few years for building up to 20% equity on your mortgage quickly, which is helpful for the next tip.
End Your Private Mortgage Insurance Early
If your mortgage didn’t include an initial downpayment of 20% of your home’s worth, there’s a good chance you need to pay for Private Mortgage Insurance (PMI). THe idea is that when less than one-fifth of the home’s value has been put up as capital, the lender is taking on additional risk. Federal law requires lenders to insure such loans with PMI, which means an extra cost to you. This security adds an extra $30 to $70 fee for every $100,000 borrowed to every payment you make. While this doesn’t sound like a lot, this is a fee that often has to be paid for several years.
There is good news though if you’re currently paying for PMI: it’s only necessary to pay for PMI until you hit 20% of your home equity! There are two great strategies for making this happen as soon as possible. Since your mortgage just has to have a balance less than 80% of your home’s equity to stop PMI, you can get your home reappraised with an approved appraiser of your lender to demonstrate an increased total value of the property.
If your home value has increased by 25% since purchase, even if your purchase was only made a year ago, you may be able to request the cancellation of the PMI with your current lender with a new appraisal from an appraiser approved by the lender. There is, however, a risk with this strategy that your home’s newly appraised value might be lower, which might delay ending your PMI further. It also costs a few hundred dollars to have your home appraised, meaning that if you’re on the cusp of hitting 20% equity, it may not be worth the added cost.
The only surefire way to get to 20% equity sooner is to make extra payments. As we explained earlier, this can also save you money on interest over the life of your loan. No matter how you choose to reach 20% equity, you can contact your lender and ask them to cancel your PMI, once you’ve reached your equity goal.
This is similar to our second tip, but it’s more structured and regular than making an extra payment when you can manage it. This option for mortgage payments effectively builds in one more payment per year. WIth 52 weeks in a year, you end up making the equivalent of 13 monthly payments when you pay half your normal monthly fee every two weeks.
Thanks to the consistency of this overachieving payment schedule, you can pay your loan off years earlier, paying thousands less in interest, even with just the single extra payment per year. Many homeowners find this structured approach to increased payments towards their principal to be very helpful. It’s important to make sure that your lender supports biweekly payments, and isn’t charging you extra fees for this style of payment, as that can cancel out much or all of the good the extra payment a year is doing.
Use Your Home Equity Wisely
For most people, your home represents your greatest financial asset. As you build equity in your home, you can borrow against that equity at a very reasonable rate when compared to high-interest rate alternatives like credit cards. It costs much more to pay off credit card debt per dollar than to pay off home equity lines of credit. A classic example of good financial practice is to use this low-interest debt to pay off your high-interest debt, potentially saving thousands of dollars.
Another option along these lines is to go for a cash-out refinance, where you’re borrowing more than you need to refinance your existing mortgage and consolidate all your debt into a single mortgage payment. Like all of our tips, this can save you thousands of dollars in the long run!
There are many ways to save money on your mortgage, both in terms of your monthly expenses and your total cost. What’s important with any strategy is consistency and the fiscal discipline to stick to your strategy. At the end of the day, the best thing you can do for your future is to take action today. If you’re ready to refinance your existing mortgage, or to find out more about your options, contact us today at 833-775-4200 or by email at info@IMhomeloans.com.