In a previous article, we detailed the strategies new homeowners can deploy to undercut the costs of a new mortgage. While that article may be helpful for those in the process for purchasing a house, many of our readers are likely to already have a home mortgage. Every person with a mortgage should look for ways to cut costs, so we’ve developed this guide to saving money on an existing mortgage.
Let’s start with why this is important—using simple numbers. Say a homeowners has a 30-year, $200,000 fixed-rate mortgage at 5% interest. That sounds pretty reasonable, right? In fact, if you make your minimum required monthly payments, you’ll end up paying a total of $186,512 in interest over the life of the mortgage. That is almost as much as the principal. Finding ways to cut your mortgage and speed up payments could save you thousands of dollars over the period of repayment. Here are some refinancing options most homeowners can consider.
Add One Extra Payment Each Year
Making one extra mortgage payment each year can have significant long-term benefits. Extra payments are applied to your principal, not interest, allowing your balance to drop while preventing you from needing to pay interest on that principal. Using the above scenario, the homeowner can save around $36,000, cutting around 4.5 years off the life of the loan. In the life of your mortgage, paying an extra $1,100 each year, even if you take it from a savings account, can have significant long-term benefits.
Begin Making Bi-Weekly Payments
This is a great trick for sneaking in an extra mortgage payment each year. In paying half of your mortgage payment every other week, you will have made 26 payments by the end of the year—13 full payments. Using the above scenario, a bi-weekly payment is around $537. This will allow you to put that additional payment toward your principal, further cutting down on interest.
Refinancing Your Mortgage
This is the most common way to save money on a mortgage. By refinancing to a lower interest rate, homeowners can reduce their monthly payments and save money on interest. However, all mortgage holders should understand that there are costs associated with refinancing; you will want to ensure you have enough cash to cover refinancing fees. If you lower your mortgage by just 0.5%, you’ll end up saving around $85 each month. If the refinance itself costs $5,000, you’ll recoup the fees after 59 months.
This option is not available to most mortgage-holders; if you had the money when taking out your mortgage, the loan amount would have, likely, been smaller. Still, a mortgage holder may come into a large sum of money through a substantial, job-related bonus or inheritance. Putting these funds into your mortgage is a great way to get the most bang for your buck. Let’s use our initial scenario, but say the homeowner receives a $20,000 bonus or cash inheritance. If applied to the mortgage during the first year of the loan, lifetime interest payments will decrease from $186,551 to $131,111—essentially saving you around $55,000 over the life of the loan. Plus, this type of investment will shorten your loan by close to six years. Furthermore, a lump-sum payment doesn’t have to be this substantial—it could be an extra $2,000 the first year, which would save you over $6,500 over the life of the loan.
Mortgage holders may feel they have few options to decrease the costs of their homes, but there are several easily implemented strategies. By investing just slightly more money in your mortgage, you can save thousands of dollars over the life of the loan. Talk with your lender about the options that will work best for your mortgage.