12 Ways to Save Money on Your Mortgage

by

Gary R. Crum 

Could you use an extra $125,000? If you are making monthly payments on a typical $180,000, 6.5% mortgage, you will pay $229,580 in interest before it's paid off. 

Here's how to save at least some of that interest:

 When you are buying a new home: 

  1. Select a fifteen-year mortgage. At 6% interest you will pay off your mortgage in fifteen years and save over $125,000 in interest verses a thirty-year mortgage. An added bonus: Lenders usually charge a lower rate for fifteen-year mortgages than for thirty-year mortgages. That will mean even more savings. A 1/4% interest rate reduction is almost a $450 interest savings in the first year of a $180,000 mortgage.
  1. Take a biweekly mortgage. By making payments every two weeks, you will pay off your mortgage in less than 23 years. You will save $54,593 in interest as compared to a regular $180,000 thirty-year mortgage at 6.5%.
  1. Consider an adjustable rate mortgage. You will get a lower monthly payment for the first year or two. Take the savings and apply it to the loan principal. If rates adjust up, you can keep your payment level by lowering the amount of your extra payment. If rates adjust down, increase your extra payment.  Look at longer term adjustable rate loans.  Loans that are fixed for the first five years can save 1% over the thirty-year fixed rate loan.
  1. Make a larger down payment. The lower the amount borrowed the less interest you will pay. Also, you may be able to negotiate for a better rate if you put down more than 20%.  If you will put down less then 20% you will probably have to pay for private mortgage insurance, an added expense.
  1. Keep track of your credit score to make sure you will get the best rate on your mortgage.  Typically a score of 680 gets market rate but with many lenders a score of more than a 720 will earn an additional rate discount.

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If you already own a home: 

  1. If you have a thirty year mortgage, pay an extra $50 dollars a month with your regular mortgage payment. At 6.5% you will pay off an $180,000 mortgage in twenty-six and a half years and save $31,455 in interest. Even smaller extra payment amounts can add up to real savings.
  1. Make an extra payment annually. Use part of your yearend bonus money to make a lump sum principal reduction. With a 6.5% interest rate, a $5,000 one time reduction in the third year you will save you $22,000 in interest and your mortgage will be paid off two years earlier!
  1. If your lender collects too much escrow money and offers you a refund, have it applied to reduce your mortgage balance. You'll never miss the money and the interest you save will be about three times as much as you can earn at today's savings account rates.  Important note:  Lenders are required to refund excess escrow funds in accordance with a specified formula.  Be sure to read your escrow analysis when it comes each year to see if you are entitled to a refund.
  2. If you are presently paying for private mortgage insurance (PMI), you can ask your lender to re-evaluate your loan to see if the current loan to value has dropped to 80% or less.  New regulations require the lender to review your request.  With increasing property values and your monthly pay down of your mortgage principal, you may be eligible to have the extra expense of the PMI dropped.  That can save you up to $140 per month.
    Important note:  Lenders must automatically drop the PMI insurance when your loan reaches 78% loan to value.
  3. Refinance your loan to get a lower interest rate. Some lenders offer to refinance loans at no cost to you. That is, they pay all of the closing costs. If the new rate is lower than you have now, jump on it. Take your monthly savings and have it applied to your loan principal. Remember, though, that when you refinance your loan term resets to thirty years amortization.
    Important note:  Use a refinance calculator to find out your breakeven point if you are paying closing costs. 
  4. Refinance your loan to get a shorter loan term. Over the past few years many homeowners refinanced to take advantage of lower rates and to reduce their loans to fifteen-year terms. 
    Important note:  Rates should be at least 1% lower than your present rate to justify the cost of refinancing.
  1. Shop the Internet. There are many web sites devoted to mortgages and if you have good credit you can have several lenders bidding for your loan.  Remember to compare APR's, not just interest rates. Type in "mortgage" in your search engine and take your pick.  Important note:  Be sure to also shop local lenders to make sure you are getting the best possible rate.

Start saving right now! Decide what you want to do and start the wheels in motion today. Your reward will come when your house is paid off before the kids start college or your careful planning lets you enjoy a worry-free retirement.