Nearly all homebuyers are forced by necessity to get a mortgage, and most people seem to think of it as a straightforward deal: They loan you the money for your home, and you repay that money over time, with a little interest. However, that last part is where the rubber meets the road.
In many instances, interest payments can end up being a huge sum of extra money. If you want to know just how much a difference it makes, check out this handy online interest rate calculator. For instance, let’s say you borrow $200,000 at an interest rate of 5%. With a loan term of three years and a monthly payment of $500, you will end up paying $182,000 in interest over time. That’s almost as much as you borrowed in the first place! To help you avoid this kind of thing, we present you with five ways that you can save money on your mortgage.
1. Make More Frequent Payments
Interest works like this: For every day that the debt exists, the debt will increase. The daily increase might be a miniscule amount, but it adds up quickly. The longer you owe the debt, the more the debt will increase. If you aren’t careful, this kind of thing can become a self-perpetuating debt, and no one wants to deal with that.
By making your payments on a bi-weekly basis (every two weeks) rather than once a month, you can effectively cut your time in half. Let’s check our online calculator again and see how much of a difference it makes. Since bi-weekly will usually mean two payments per month, let’s double our monthly payment and see if our example gets any better. By doubling the monthly payment to $1000, the total amount of interest paid becomes $164,000 instead of $182,000. That equals a total savings of almost $20,000.
2. Use Your Tax Refund On The Principal
This little trick works on the same principles as the first one. Anything that you can do to shorten the term of repayment is going to reduce the amount of interest that you pay over time. We have already given you a way to knock about $20,000 off the total, but this one might be even better.
By taking your yearly income tax return and putting it towards your mortgage, you will save yourself a lot of money. Of course, this does require personal discipline since most people like to spend their income tax money on things that they want.
But how much will this reduce the interest? Let’s use the calculator again. We will use the same numbers as before, building from the foundation that we have already established. The average annual income tax return will get you about $3000. Since our example loan had a term of three years, we can apply this number three times. So, when we reduce the principal by $9000, the total interest paid is reduced from $164,000 to $155,000.
3. Get Rid Of Private Mortgage Insurance
When you make a down payment on a new home, you will usually pay 20% of the total sale price. You can choose your down payment amount, to some extent, but there is a catch. If you pay less than 20%, you will have to buy a separate insurance policy called private mortgage insurance (PMI). PMI is just an extra monthly payment that is intended to discourage borrowers from putting down less than 20%
If you made the mistake of getting PMI, all is not lost. You will only be required to keep this extra policy until you have paid at least 20% of what you owe. Thus, you should keep track of what you owe and what you have already paid. As soon as you go above that 20% mark, be sure to cancel the PMI policy after consulting with your lender.
4. Consider Mortgage Renegotiation
Here’s a little trick that lenders probably don’t want you to try: Once you have paid your mortgage down to a reasonable level, you can use that reduced debt as leverage with which to negotiate terms. Most lenders will offer the option to “re-cast” or “re-amortize” your loan. Those are just fancy ways of saying that the terms of the loan will be renegotiated. This will include a new monthly payment amount and (most likely) a new interest rate.
The only little problem is that this plan can backfire if you aren’t careful. Before doing this, you should consult an outside expert and make sure that you aren’t likely to end up with an increased payment or a higher interest rate.
5. Raise Your Credit Score
This little trick is meant to be used in conjunction with trick number four. When it’s time to renegotiate your payments and interest rate, you can bet that the lender is going to be a shrewd negotiator. They don’t want to lose even a single penny, so you will have to outsmart them to a certain extent.
Before it’s time to renegotiate the loan, do some things to improve your credit score. It might be as simple as taking out a micro-loan and returning it as agreed. Your credit score is one of the things that determines both your payment amounts and interest rates. Therefore, improving your credit is a method that can be used to reduce your mortgage interest in a direct way.
While a mortgage might seem like a crushing debt that you will never pay, it isn’t as bad as it might sound. Most mortgages are paid off without incident, even though many others are not. By using these simple tricks outlined above, you can save yourself hundreds and probably thousands of dollars. Just think: Someone got paid to write this article, but you might get paid a lot more by reading it! The first tip on our list alone could save you $20,000 or more, so just imagine that for a moment. If you are grateful to us for saving you all that money, please fill out the contact form below.