10 mortgage hacks every homeowner should know to save thousands
Jhe average monthly mortgage cost in the United States is $1,492 per month according to data from Value Penguin. As such, it is usually one of the largest items in a person’s budget.
If homeowners want to lower that monthly payment faster, there are several mortgage tricks you can implement that will save you thousands of dollars on your home loan.
Hack #1 Get rid of PMI insurance.
Private Mortgage Insurance, or PMI, is insurance that protects the lender in the event of default on your home loan. PMI is required if you have a conventional loan and are making a down payment of less than 20% of the home’s value.
Even if you have paid a small deposit, there are several ways to get rid of the PMI. One way is to simply make additional payments on your mortgage until you hit the 20% equity mark. At this point, you can contact your lender and ask them to cancel your PMI insurance. If you are unsure of the current value of your home, you can always do an online appraisal.
Another option is to refinance into another type of mortgage. For example, you can refinance an FHA loan into a conventional loan once you’ve built up enough equity. There are also new types of loans that do not require PMI insurance, even with a small down payment. So if you’re tired of paying for PMI, be sure to explore all of your options to get rid of it. It could save you hundreds of dollars every month, giving you
Hack #2: Make payments every two weeks instead of monthly.
Most people are used to making monthly payments on their mortgage, but there’s another way that can save you money and help you pay off your home even faster.
If you make payments every two weeks instead of every month, you’ll end up making 26 half payments each year instead of 12 full payments. This could reduce your mortgage by several years and save you thousands of dollars in interest payments.
Plus, bi-weekly payments can help reduce your overall debt load, making it easier to qualify for a home equity loan or line of credit later. So if you’re looking for a way to get ahead financially, consider switching to bi-weekly mortgage payments.
Hack #3: Refinance for a shorter loan term.
A simple way to hack your mortgage and save a ton of money is to refinance a loan to a shorter term. While it might seem counterintuitive — after all, shorter loan terms usually mean higher monthly payments — in the long run, you’ll save a ton of money in interest.
For example, suppose you want to refinance your $300,000 mortgage over another 30-year term. Your mortgage payment at 4% interest would be approximately $1,432 per month and you would pay $214,608 in interest over the life of your loan.
However, if you refinance your $300,000 mortgage over a 20-year term, you will only pay $136,305 in interest over the life of your loan. Yes, your monthly payment would be higher with a 20-year term at $1,817, but your overall interest savings would be significant.
So if you can rock the higher monthly payments, you could be mortgage free sooner. and save considerably in terms of interest if you refinance at a shorter term. Alternatively, you can also pay more each month and not refinance and “shorten” the term yourself.
Hack #4: Refinance at a lower interest rate.
If you’d rather save money each month on your mortgage payment than save for the long term with interest, consider refinancing at a lower rate. If you cannot negotiate a lower interest rate with your current lender, you may be able to refinance at a lower rate with another lender. This is especially true if rates have fallen since you got your loan.
If you’ve been living in your home for a few years and have built up equity, find out if this is an option for you by calling your lender and asking about current rates. If rates have fallen since you originally financed your home, you may be able to save money by refinancing. Be sure to compare refinancing costs with the amount of money you’ll save on your monthly payments before making a decision.
To give you an example, a mortgage of $275,000 with a 30-year mortgage at 4% has a monthly payment of $1,412.89. However, a $275,000 30-year mortgage at 3% interest has a monthly payment of $1,159.41, a savings of over $250 per month or just over $3,000 per year. What could you do with an extra $3,000 a year?
Use a mortgage calculator to find out how much you could save by refinancing.
Hack #5: Get rid of escrow accounts.
Escrow accounts are often required by lenders to ensure homeowners have enough money to pay their property taxes and insurance premiums. However, these accounts can also add hundreds of dollars to the cost of a mortgage each year.
Fortunately, there is a way to get rid of an escrow account: just budget for taxes and insurance yourself, then make your own payments. It may take some extra effort on your part, but it can save you a lot of money in the long run. Just be sure to stay disciplined in your budgeting so you don’t fall behind on payments.
Hack #6: Make extra payments when you can.
If you earn extra money – say, from a work bonus or a tax refund – consider making an extra payment on your mortgage. Even a small amount can help reduce your principal balance and save you money in interest over the life of your loan.
Keep in mind that you should always have some cash on hand for emergencies, so make sure you have it on hand before making an additional mortgage payment.
If you make enough extra payments over time in addition to a few other hacks on this list, you can absolutely pay off your mortgage sooner.
Hack #7: Pay attention to your loan amortization schedule.
Amortization is the process of spreading out a loan in equal installments over a set period of time. Most mortgages are amortized over 30 years, which means that each monthly payment includes both principal and interest. However, the ratio of principal to interest changes over time.
In the early years of a mortgage, the majority of each payment is used to pay interest. However, as the loan balance decreases, a larger and larger portion of each payment is used to repay the principal.
If you want to save money on interest, pay close attention to your amortization schedule and make additional principal payments when you can.
Hack #8: Negotiate a lower interest rate with your lender.
To get the best possible rate on your mortgage, it’s important to be proactive and negotiate with your lender. One way to do this is to compare interest rates from different lenders. By shopping around and getting quotes from multiple sources, you can pressure your lender to offer you a lower rate.
Another tactic is to request a “floating” option, which allows you to lock in a lower rate if rates drop before closing your loan. Although it can take time and effort, negotiating a lower interest rate can save you thousands of dollars over the life of your loan. Even a small reduction in your rate can save you thousands of dollars over the life of your loan.
Tip #9: Consider an adjustable rate mortgage.
An adjustable rate mortgage (ARM) has a low initial interest rate that typically lasts five or seven years (sometimes longer). After that, the rate adjusts according to market conditions. If rates go up, your payments will go up. But if rates go down, you’ll save money on interest.
“People often think that if they don’t lock in their mortgage for 30 years and interest rates go up, they’ve automatically ‘lost’, but that’s not necessarily the case,” says Seth Burstein, CEO of Fortunately, a website that helps people optimize their complete financial picture. “If you take those initial savings and invest them, that money can more than offset an increase in mortgage payments when rates adjust.”
Just make sure you understand how RMAs work before signing up. And make sure you’re comfortable with the idea of your payments increasing in the future.
Hack #10: Live in your own investment property
Another way to hack your mortgage is to buy a home with investment income potential. Also called a “house hack,” this strategy can provide you with extra cash that you can use to pay off your mortgage or even live for free.
Chad Carson, for example, bought a quadruplex as his first real estate investment. He lived in one apartment and rented the other three. The income from his tenants enabled him to pay his mortgage each month in addition to the necessary maintenance costs. As such, he was able to live there completely free of charge.
Ultimately, if you want to find ways to save money on your mortgage, these ten hacks are a great place to start. By paying attention to your amortization schedule, making extra payments on your principal, and seeking the best interest rates, you can save thousands of dollars over the life of your loan.
By Jeff Rose for Due.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.