For most homeowners, a mortgage is a reality unless you are lucky enough to pay for your home in cash. Just because a mortgage is an expense, however, doesn't mean that you just have to grin and bear it. On the contrary, a mortgage is just like any other big-ticket item you buy; you should find ways to save money when and if you can.
Money Saving Tips
Here are eleven of the best ways to save on your mortgage, greatly reducing the amount of money you pay over the life of the loan.
Pay Extra Each Month
When you pay more than the minimum amount due on your mortgage, the extra money deducts directly from the principal balance of your loan. Commit to paying one extra mortgage payment per year and you can shave at least five years off the term of your mortgage and potentially save tens of thousands of dollars overall.
You can opt to make the extra payment in one lump sum or divide the extra payment by 12 and add the amount to your monthly payments. In the long-term, this step saves you more money than other saving methods. Be sure to specify that the extra funds are to go toward the principal balance when you make the payment.
PMI stands for private mortgage insurance. When a lender loans you more on your home than they are normally willing to (more than 80 percent of the purchase price of the home), they charge you a monthly insurance fee, known as PMI. This insurance protects the lender, not you, in case you default on the loan. You can save upwards of $1,200 per year by skipping the PMI. This is one of the best ways to save money because the monthly PMI payments are not benefiting you at all since they don't pay your balance down.
If your home value has increased so that your mortgage balance is 80 percent or less of the market value of your home, then request your lender drop your PMI. Some lenders require a new appraisal on the home and may charge you an appraisal fee. Most appraisals are $450 or less, but in the long run, skipping the PMI payments adds up to a lot of savings over the life of your loan-even after having to pay for a new appraisal.
Create Your Own Bi-monthly Payment Program
You have likely received an advertisement from your mortgage company offering you a bi-monthly payment program so you can save big money on your mortgage. This program requires you to pay half of your monthly mortgage payment every two weeks instead of paying the entire payment once a month.
You can create the same savings plan by creating your own bi-monthly payment program. Instead of paying half your mortgage payment to the mortgage company every two weeks, deposit the money into a personal savings account instead. Once a month, use the two half payments you have deposited to make a monthly mortgage payment.
With 52 weeks in a year, you'll have made 26 deposits into your account, leaving you with the thirteenth payment to make to the mortgage company for the year. At the end of the year, you will have an extra mortgage payment in your account to make toward paying down the principal.
Divide and Conquer
If your home has a setup that lends itself to creating two living spaces, rent one of the areas out while you live in the other one. Walk-out basements or multiple story homes that can be separated into apartments work well for this scenario. Check with your county to make sure the home can be zoned for multiple families. If you are so inclined, you can even rent out one or more rooms in your home without separating the common living areas.
Renting out the extra space can provide you with income to offset the cost of your mortgage payment. Each month, use the rental income to make you mortgage payment-adding in your own money to make up the difference of the payment. In some cases, you can rent out the extra space for the same amount or more than your mortgage payment, so you are living in the other space mortgage free.
Change Your Financial Situation
Especially since the downturn in the market since 2007, it is harder for self-employed individuals and those with poor credit to obtain a loan. For those that are able to obtain a mortgage, the terms and conditions don't tend to be as favorable as salaried employees and those that have great credit.
If your situation changes, or if you can take steps to change your situation, it can be financially beneficial to you whether you are purchasing a home or refinancing one. If you plan to buy a home in the next few years, work on making these changes now, so you look financially sound when it's time to apply. If you already own and have already made these changes, consider refinancing your mortgage. You can save money on interest, monthly mortgage payments and tens of thousands of dollars on the interest you pay overall.
Apply for a Mortgage Recast
A mortgage recast is when your mortgage lender recalculates the monthly mortgage payments based on a large principal balance payment you make. Normally, even if you make principal reductions on your mortgage, the monthly payment remains the same. With a mortgage recast, however, your monthly payment is lower because it is based on the new principal balance of your mortgage.
While this requires you to pay more money upfront, it can save you thousands of dollars in interest over the life of your loan.
Escrow Your Own Taxes and Insurance
Instead of having your mortgage company collect the taxes and insurance payments as part of your monthly payment to them, deposit your own taxes and insurance into a savings account. Pay your insurance bill in full for the year when it comes due. Do the same for your tax bill. Instead of the mortgage company earning interest on your money, you earn the interest.
You can use the extra income you earn on interest to make a principal payment to your mortgage, creating even more savings on interest to you over the long-term. Some mortgage companies charge you extra if you do not escrow your taxes and insurance, so check with your lender or servicing company prior to implementing this option.
Paying points allows you to buy down the interest rate on your mortgage. The more points you pay, the lower your interest rate is, which lowers your monthly payment and decreases the amount of interest you pay overall.
Keep in mind that there are upfront costs associated with this option because each point you pay equals one percent of your loan amount. For example, if the mortgage amount is $100,000 then you are paying $1,000 in addition to the closing costs you pay on the mortgage when you buy or refinance the home. In general, if you plan to own the home and keep the same mortgage for a long term, generally five to seven years or longer, then it can be beneficial to buy points.
Choose a Shorter Term
While a 30 year mortgage lowers your monthly mortgage payments, it increases the amount of interest you pay over the life of the loan. One way to save money overall is to choose a shorter term, such as a 15 year mortgage. The shorter term increases your monthly mortgage payments, but it decreases the amount of interest you pay on the mortgage in long run.
Shop and Compare
Just as you would with any major purchase you make, you should shop and compare your options for mortgage financing. Try to talk with and gather information from at least three different mortgage lenders. Some of the information you should gather includes:
- Type of mortgage (Fixed or adjustable)
- Term (Number of years of the mortgage)
- Interest rate
- Annual percentage rate (APR)
- Itemized estimate of the closing costs
When comparing mortgage options, it is important to compare apples to apples and oranges to oranges to conduct a true comparison. For example, if you gather information on a 15 year fixed rate mortgage from one lender, then gather the same information for the same mortgage from the two other lenders.
The best way to determine the least expensive mortgage option is to compare the APRs over the interest rates. The APR is the true cost of credit (the amount it is costing you to borrow the money to finance the home) in that the APR includes your upfront costs and monthly payments as a percentage rate. The lender that is offering you the lowest APR is really offering you the least expensive mortgage overall--as far as costs are concerned.
Challenge Your Property Assessment
If you escrow for your taxes so you make tax payments as part of your monthly mortgage payment, you can also save money by challenging the assessed value of your property, If you think your property value is less than that assessed by the county tax collector where your property is, then you can appeal the value with the county.
If the assessor determines the value of your home has declined, then your annual property tax payment can decline also (decreasing the monthly payment you have to make along with your mortgage payment). You can challenge your property taxes even if you don't escrow for the payment; it can save you money on your property tax bill either way.
Save on a Big Expense
Your mortgage is likely one of the biggest monthly expenses you have. Fortunately, there are proactive steps you can take in saving yourself hundreds, thousands, and perhaps even hundreds of thousands of dollars a year.