6 Brilliant Ways to Reduce Your Mortgage Cost
Did you know you can cut your mortgage costs and pay it off faster? If you want to save money each month or you hate the idea of having to pay your home loan for the next 30 years, consider these tips:
Cut out PMI
A quick and easy way to cut $1,000 or more a year from your mortgage cost is to drop your PMI payments. If you owe less than 80% of your home’s value, you may be eligible to get rid of your PMI (private mortgage insurance) which can add up to an additional 1% to your monthly bill. With the PMI payment gone, you can throw that extra cash directly toward the principal of your loan to pay it off faster, or you can put that money into savings.
If you didn’t put down at least 20% when you purchased your home, you probably have PMI on your mortgage. Many people go on paying it for years, without ever checking if they need to keep paying it. If you think your home has increased significantly in value or you've paid down a huge chunk of your mortgage, check to see if it's possible for you to kick PMI to the curb. The best way to find out if you're eligible is to call your lender and set up an appraisal. That way, you can prove you have at least 20 percent equity.
Make one extra payment each year
You can shave years off the life of your mortgage – and save big bucks in the process – by rounding your payment up. One extra payment might sound like a big chunk of money, but with this method, it’s not a budget breaker. A small increase can have a big impact on your mortgage, helping you save on interest and pay your home off faster.
Case in point: If your monthly mortgage payment is $477 a month (a $100k 30-year loan with 4% APR), you would pay $517 each month ($477/12+$477).
By paying an additional 1/12th of your mortgage payment each month, you’d pay off your home 5 years faster and save $13,210 in interest!
Set up bi-weekly payments
This is an alternate version of the method above. Reduce your overall mortgage cost and pay off your loan faster by switching to bi-weekly payments. The idea behind making bi-weekly payments is simple: By paying half of your payment every two weeks instead of once per month, you'll wind up making at least one extra mortgage payment every year. The savings here are similar to the scenario above.
Refinance your home loan
Right now, 8.7 million Americans could save money by refinancing their homes. With mortgage rates near historic lows, refinancing into a lower rate can help you save a lot of money on your mortgage costs.
Here are 3 scenarios where you may want to look into refinancing.
1. Your mortgage rate is higher than the current rates –If you purchased your home before 2010, you should definitely look into refinancing to see if you can lower your mortgage rate.
2. Your credit score has improved. – Credit scores can have a big impact on your mortgage rate. If your credit score has gone up since you purchased your home, you could be eligible for a much better rate than you currently have.
3. You have a 30 year mortgage – If your goal is to pay off your loan faster and pay less overall interest, switching to a 15-year loan may be the perfect answer. 15-year loans typically have lower rates, so you’ll pay thousands less over the lifetime of your loan. However, this option will likely increase your monthly mortgage payments.
Score a VA loan (if you're a veteran)
VA loans are some of the best deals available. If you're a veteran, it's crucial you look into the available VA loans created just for you. The average savings for those who refinance from a conventional mortgage to a mortgage with VA benefits is a healthy $3,100/year. If you already have a VA loan, you may be eligible for their “IRRRL” streamline refinance to reduce your existing rate. This simple process can be done without an appraisal and without any out-of-pocket expenses.
As a final tip, it might help to assess your living situation in its entirety. If your kids have moved out or you have more room than you really need, you may be able to speed up the mortgage process by trading down to a smaller home.
Of course, selling your home won't be cheap. You'll have closing costs and potential repairs to deal with, along with realtor fees and moving expenses. Still, the costs might be worth it if you can drastically reduce the size and length of your mortgage. Remember, the smaller your mortgage, the faster you'll be able to pay it off.