For most people, their mortgage is undoubtedly the most expensive payment each month. Although nobody likes paying bills, each dollar you spend is a check that is written to protect your future. A home is much more than just a place to live, after all. When utilized wisely, it's an investment that can help you and your family safeguard for major purchases, retirement, or even credit card debt repayment.
There are various strategies that can be implemented to lower the overall expenses associated with your mortgage if you play your cards right. Let’s understand each one of them in detail.
1. Refinancing Your Mortgage
To pay off the balance you have on your mortgage, you refinance by essentially replacing your current loan with a new one. As a result, you may get a lower monthly payment than you did previously. When you refinance mortgage loan, you have the opportunity to change the conditions of your loan or get a lower interest rate, which might result in significant mortgage savings.
2. Boost Your Savings with a Conventional Mortgage
If you've set aside money for a vacation or a significant purchase, consider adding it to your down payment to reach the 20% threshold for a 'conventional' mortgage.
By achieving this 20% down payment milestone, not only will you reduce the size of your mortgage and lower monthly payments, but you will also have the option to extend the loan term to 30 years for even lower monthly payments (explained further below). Another benefit is that you won't have to deal with the mortgage default insurance required for mortgages with less than 20% down.
Let's consider an example: Imagine you're buying a $600K home with a down payment of 15% instead of 20%. The potential savings, compared to a standard 25-year amortization, could exceed $45K. While a conventional mortgage typically comes with a slightly higher interest rate (due to the absence of insurance on the loan), the overall savings can still be substantial.
3. Pay Bi-Weekly
A great way to accelerate mortgage paydown is to split your mortgage payment into equal installments every two weeks rather than one large payment each month. Although you won't really notice a difference, carrying out this step is the same as paying an additional annual mortgage payment in full.
Since there are 52 weeks in a year, paying every two weeks will require you to make a total of 26 payments. You're essentially making one extra payment without experiencing any additional financial strain because it equates to thirteen whole monthly payments. Just that can cut your mortgage term by many years, and the longer you take to pay off your mortgage, the less interest you will pay and the more money you will save
4. Spend Less on Other Debt
This could be a smart time to refinance if you have other debt with higher interest rates so that you can combine all of your debts into one mortgage payment at a reduced rate. It might provide you more budget space and help you save money on interest. The key is to concentrate on paying off your new mortgage rather than pursuing other loan options once more.
Pay off as many loans as possible, leaving only one mortgage. Although your monthly mortgage payment would increase, other bills will not pinch your pocket. You could possibly free up cash flow and save thousands on interest payments.
5. Take an ARM Into Consideration
Consider moving to an adjustable rate mortgage if you have a fixed rate mortgage and don't intend to stay in your current residence for longer than five years. After five years, the rate on an ARM becomes variable and reflects the prime rate. Until then, you will pay a low rate. In case interest rates are currently low and you expect purchasing a home within the next five years, an ARM can be a good option for you. By doing this, your monthly mortgage payments may be reduced by hundreds of dollars.
The Key Takeaway
The answer to lowering your mortgage payment is to be proactive and grab each chance to cut expenses. Over the course of your mortgage, you can save thousands of dollars by doing your research, making additional payments, and maintaining a high credit score. To ensure you're getting the most for your money possible, don't forget to remain mindful while considering all of your options.