When you purchased your home, you had to choose how you were going to pay for it. In some cases, if you’ve been in the market for a while or are perhaps scaling down to a less expensive house, you may have paid cash for your new home.
However, in the year 2017 – according to the National Association of Realtors – 88 percent of all home buyers took out a mortgage of some sort when they made a home purchase. It may have been a “conventional” mortgage, or it may have been an FHA or VA loan. Regardless of the type, however, money for a home purchase was borrowed by nearly 90 percent of all those who made a home purchase that year. That’s a lot of loans!
Mortgages are certainly a convenience…but they’re also expensive, and it usually takes decades to pay them off. But there are a few ways you can take a chunk out of that mortgage debt if you’d like to pay off the loan sooner, and many homeowners are taking advantage of these options.
This is the most common way to reduce your payment though it won’t work for everyone. It’ll depend on your current rate and how long you’ve owned your house. It’s important to remember, however, that even lowering your interest rate, a percentage point or two could make a massive difference in your monthly payment. So, know your loan and how much interest you’re paying and keep your eye on the current interest rates to determine when might be a good time to make a move.
When refinancing, you can also change the duration of your loan from 30 years to 15 years. This will not likely reduce the payments – unless there’s a huge difference in interest rate – but you will pay off your loan much sooner and probably save thousands to tens of thousands of dollars, depending on your loan amount. So, your savings comes in the form of total interest paid over the life of the loan. And you can burn that mortgage document a lot sooner? Of course, you’ll have to qualify for the higher payment.
Though it’s not an idea that comes up frequently, the option of making bi-weekly payments (one payment split into two) instead of one full payment a month is a valid one. Why does this work? Well, when you make bi-weekly payments, you wind up making the equivalent of 13 rather than 12 payments each year. If you do this over the life of the loan, you wind up reducing your mortgage by five years, paying it off in 25 rather than 30. At the average home price of $300,000 at 4.5 percent interest, you’ll save a whopping $40,000!
You’ll have to check with your mortgage company, however, as to whether or not they will allow this practice. Some might charge a fee, so you’ll need to weigh that cost with your savings to see if it’s still worth it.
Paying extra principal
Did you know that you can add extra money to your monthly payment? If you throw even $25, $50, or $100 a month additional at your mortgage payment, you’ll significantly reduce the amount of interest paid and will pay off the loan faster.
But where will you get this extra money? A lot of people find that if they examined their habits and cut down on spending, they’ll have a little extra for their mortgage. For example, if you eat lunch out with your colleagues twice a week at the cost of $25 per outing, reducing it to once per week will give you an extra $100 to apply to your mortgage each month. You may find that a savings like that is well worth brown-bagging it!
Large sum gifts
If you receive an inheritance, bonus, or other monetary gifts that is substantial and unexpected, you can apply that to your mortgage as well. These financial windfalls – the ones that are a surprise – are likely not earmarked for anything in particular, so why not spend at least part of it to your mortgage company to pay down your debt? Depending on the size of the gift, this extra cash could reduce your mortgage obligation by a lot! Make it clear to your lender, however, that the extra money goes towards the principal, not towards future payments.
Communicate with your lender
Many of us apply for a mortgage, are approved, and then never hear from our lender again. So, it’s your job to keep in touch and see what options are available for reducing your mortgage and when might be the best time to take advantage of those options. The money saved could be substantial!