If you’re like most of us, you’re always looking for ways to save on your monthly bills. Changing TV or cell phone providers, switching car insurances, joining shopping clubs like Sam’s Club or Costco…these are all ways we cut down on expenses. But one of the largest expenses you have – your mortgage – is usually the last place you consider when it’s time to trim down. Surprisingly enough, with a little bit of planning and effort, there are quite a few ways you can spend less on your mortgage.
Make 13 Payments a Year
This strategy saves you money in the long run, because the extra money you put toward your mortgage comes right off the top of the principal of the loan. When you commit to making an extra payment each year, you can shave as much as five years off the length of your loan, potentially saving you thousands of dollars. Divide your monthly mortgage payment by twelve – this is the extra amount you’ll need to cover each month. You can either deposit the money into a savings account each month and make one extra payment at the end of the year, or add the additional amount to each of your monthly payments. Make sure your lender knows in advance that the additional money you’re sending should be applied to the principal of your loan.
Dump Your PMI
PMI, or private mortgage insurance, is required by lenders when you make a smaller down payment on a home than they would like. PMI is not your friend; it exists to protect the lender if you should default on the loan. Most lenders prefer a 20% down payment and will require PMI if you don’t have it. If you can find a way to put at least 20% down on your home, you can avoid PMI altogether. If not, be ready to act as soon as you have options. Once your mortgage balance is less than 80% of the market value of your home, you can ask your lender to drop your PMI. If you have an excellent payment history, many lenders will be willing to consider it. Also, if the value of your home has increased since you’ve bought it, you can also ask for a new appraisal to adjust the percentage of value you currently have in your home. You may have to pay for the appraisal out of pocket, but a few hundred dollars is a small sacrifice when you consider that dropping PMI can save you over $1200 a year.
Recast Your Mortgage
If, at some time, you come into a sum of money you weren’t expecting, consider a mortgage recast. Not every lender offers recasting, but if yours does, it may a great option for you. In a mortgage recast, your lender recalculates your monthly mortgage amount if you’re willing to drop a sizable sum on your principal balance. Unless you make other arrangements, your monthly payment remains the same regardless of how much of the principal you’ve paid. When you ask for a mortgage recast, your monthly payment requirement can be lowered because it is based on the new principal balance of your mortgage. If you want to leverage your savings, you can continue to make the old payment every month, with the additional funds continuing to reduce your principal.
Escrow Your Own Taxes and Insurance
Escrow accounts are set up by your mortgage company to collect the taxes and insurance payments due on your home as part of your monthly payment to them. Instead, set up a savings account that will cover your taxes and insurance. Pay your insurance and tax bills in full when the bill comes due. The mortgage company no longer earns interest on your money, you do.
Earmark the interest income for another principal payment to your mortgage, creating more long-term savings. Your lender may charge you a fee if you do not escrow your taxes and insurance with them, so make sure any charges won’t reduce your savings substantially before giving this a try.
Get Rewarded for Your Hard Work
If your life situation has changed for the better since you took out your mortgage, you may benefit from refinancing. Promotions, raises, noteworthy increases in your credit rating or sources of additional income can save you hundreds of dollars a year if they translate into lower a lower interest rate.
Your mortgage may be your largest monthly bill, but you don’t have to grit your teeth and bear it. You can use some of these strategies to reduce your payments, either in the short term or over the long haul. If you’ve come up with your own creative ways to find mortgage savings, drop us a line and let us know. We’d love to share your success story!