By Due. Originally published at ValueWalk.
The average monthly mortgage cost in the U.S. is $1,492 per month according to data from Value Penguin. As such, it’s typically one of the largest line items on a person’s budget.
If homeowners want to reduce this monthly payment faster, there are several mortgage hacks 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 case you default on your home loan. PMI is required if you have a conventional loan and make a down payment of less than 20 percent of the home’s value.
Even if you made a small down payment, though, there are a few ways to get rid of PMI. One way is to simply make extra payments on your mortgage until you reach the 20 percent equity mark. At that point, you can contact your lender and ask them to cancel your PMI insurance. If you’re not sure how much your home is currently worth, you can always complete an online home appraisal.
Another option is to refinancing into a different 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 some new types of loans that don’t 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 about potentially getting rid of it. That could save you hundreds every month, giving you
Hack #2: Make bi-weekly payments instead of monthly.
Most people are accustomed to making monthly payments on their mortgage, but there is another way that can save you money and help you pay off your home even faster.
If you make bi-weekly payments instead of monthly, you will end up making 26 half-payments each year instead of 12 full payments. This could shave years off your mortgage and save you thousands of dollars in interest payments.
In addition, bi-weekly payments can help to reduce your overall debt load, making it easier to qualify for a home equity loan or line of credit down the road. So if you’re looking for a way to get ahead financially, consider making the switch to bi-weekly mortgage payments.
Hack #3: Refinance to a shorter loan term.
One simple way to hack your mortgage and save a ton of money is to refinance to a shorter loan term. While this may seem like a counterintuitive move – after all, shorter loan terms typically mean higher monthly payments – in the long run, you’ll save a ton of money in interest.
For example, let’s say you want to refinance your $300,000 mortgage to another 30-year term. Your mortgage payment at 4% interest would be around $1,432 per month and you would pay $214,608 in interest over the course of your loan.
However, if you refinance your $300,000 mortgage to a 20-year term instead, you would only pay $136,305 in interest over the course 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 swing the higher monthly payments, you could be mortgage-free sooner and save significantly in terms of interest if you refinance to a shorter term. Alternatively, you can also pay more each month and not refinance and “shorten” the term yourself.
Hack #4: Refinance to a lower interest rate.
If you’re more focused on saving money every month on your mortgage payment versus saving over the long term with interest, consider refinancing to a lower rate. If you can’t negotiate a lower interest rate with your current lender, you may be able to refinance to a lower rate with another lender. This is especially true if rates have gone down since you originally got your loan.
If you’ve lived 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 gone down since you originally financed your home, you may be able to save money by refinancing. Be sure to compare the costs of refinancing with the amount of money you will save on your monthly payments before making a decision.
To give you an example, a $275,000 mortgage 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 per 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 as a way to ensure that 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 every year.
Fortunately, there is a way to get rid of an escrow account: simply budget for taxes and insurance yourself and then make your own payments. This may require some extra effort on your part, but it can save you a significant amount of money in the long run. Just be sure to stay disciplined with your budgeting so that you don’t fall behind on payments.
Hack #6: Make extra payments when you can.
If you come into some extra cash – say, from a bonus at work 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, you should always keep cash on hand in case of an emergency, so make sure you have that on hand prior to making an extra mortgage payment.
If you make enough extra payments over time in addition to some other hacks on this list, you can absolutely pay off your mortgage early.
Hack #7: Pay attention to your loan’s amortization schedule.
Amortization is the process of spreading out a loan into equal payments for a set period of time. Most mortgages are amortized over a 30-year term, which means that each monthly payment includes both principal and interest. However, the proportion of principal to interest changes over time.
In the early years of a mortgage, the majority of each payment goes towards paying interest. However, as the loan balance decreases, more and more of each payment goes towards paying down the principal.
If you want to save money on interest, pay close attention to your amortization schedule and make extra payments on the principal when you can.
Hack #8: Negotiate a lower interest rate with your lender.
To get the best possible rate on your mortgage, it is important to be proactive and negotiate with your lender. One way to do this is by comparing interest rates from different lenders. By shopping around and getting quotes from multiple sources, you can put pressure on your lender to offer a lower rate.
Another tactic is to ask for a “float down” option, which allows you to lock in a lower rate if rates fall before you close on your loan. Although it may take some 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.
Hack #9: Consider an adjustable-rate mortgage.
An adjustable-rate mortgage (ARM) has a low introductory interest rate that usually lasts for five or seven years (sometimes more.) After that, the rate adjusts based on market conditions. If rates go up, your payments will increase. But if rates go down, you’ll save money on interest.
“People often think if they don’t lock in their mortgage for 30 years and interest rates go up, they’ve automatically ‘lost’, but this isn’t necessarily the case,” says Seth Burstein, CEO of Fortunately, a website that helps people optimize their complete financial picture. “If you take those introductory savings and invest them, that money may more than offset an increase in mortgage payments when rates adjust.”
Just be sure to understand how ARMs work before you sign up for one. And make sure you’re comfortable with the idea of your payments going up in the future.
Hack #10: Live in Your Own Investment Property
Another way to hack your mortgage is to purchase a home with investment income potential. Also called “house hacking,” this strategy can provide you with some extra cash that you can use to pay down your mortgage or even live for free.
Chad Carson, for example, purchased a fourplex as his first property investment. He lived in one apartment and rented out the other three. The income from his renters enabled him to pay his mortgage each month in addition to any maintenance fees that came up. As such, he was able to live there completely for free.
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 shopping around for the best interest rates, you can save yourself thousands of dollars over the life of your loan.
Article by Jeff Rose, Due
About the Author
Jeff Rose is an Iraqi Combat Veteran and founder of Good Financial Cents. He teaches people wealth hacking. He is a frequent on CNBC, Forbes, Nasdaq and many other publications. He is author of the book “Soldier of Finance: Take Charge of Your Money and Invest in your Future” where he teaches how he escaped from $20,000 in credit card debt to a life of wealth.
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