The dream of home ownership is still alive and well in America. It has long been a symbol of prosperity and of freedom. Making a mortgage payment instead of paying rent to a landlord is a sign of autonomy to many, which makes them feel more in control of their lives and financial security. A home can be a significant, if not the most significant, personal asset many people have. Finally, even though the cost of owning a home can add up, to many it is still a sign of having "arrived." For all of these reasons and more, finding ways to save money on your mortgage is a relevant topic to many cash-strapped Americans.
Whether you're looking for ways to free up more money to throw at debt, save for the future or just want to pay off your mortgage altogether so you can be completely debt-free sooner, trimming some of the fat on your mortgage may be a viable way to help you accomplish your financial goals.
1. Make an extra payment each year
Making extra payments on your mortgage can help you save money on your mortgage by cutting down the total cost you pay over the life of the loan. By making just one extra payment a year, you can shave thousands of dollars and years off your mortgage.
If you can afford it, start making bi-weekly mortgage payments. This is an aggressive strategy that will interest people who are eager to pay their mortgage off quickly. If you are not worried about paying off your mortgage super-fast, you can still make one extra payment each year on the principal and save money in the long run.
You can use money from your tax refund, a raise or bonus, or an extra paycheck to fund the additional mortgage payment each year.
2. Drop your PMI
If you put less than 20% down on your home, you're often required to pay private mortgage insurance (PMI) which increases the cost of your mortgage. PMI will typically be anywhere from .5%—1% of your entire annual payment on an annual basis. This can often be in the neighborhood of $100, or more, depending on your loan amount.
The good news is that with a conventional home loan, you can usually drop PMI as soon as you have 20% equity in the house. You'll need to petition your lender to do this but if you're getting close, dropping PMI is definitely worth it and will help lower the cost of your mortgage.
3. Refinance your mortgage
Another thing you might want to do is refinance your mortgage if your interest rate is higher than the current market rate. Having a fixed-rate mortgage can be beneficial but not when rates drop and you could be saving money. If your credit is good and you can secure a lower interest rate, refinancing may be a good idea.
However, you need to consider the fact that there are some costs associated with refinancing your mortgage. You want to make sure you have an estimate of those fees and can afford them before deciding to refinance. Also, run some calculations to see if you can actually save money on your mortgage by refinancing. There are plenty of free refinancing calculators available online.
One other factor to consider with refinancing is that while it may help lower your monthly payment, it make extend the time it takes you to pay the mortgage off, which may end up costing more you in the long run since you'll be paying more interest overall.
Consider refinancing if doing so will significantly lower the amount of interest you are paying on your loan, but be wary if it will only lower your monthly payment by dragging out your mortgage longer and not help you pay off the mortgage early.
Remember, paying less per month and saving money on something are not the same thing.
4. Modify your mortgage
Financial hardships occur all the time. If you are going through one and falling behind on your mortgage payment, you may be able to qualify for a loan modification, which could help reduce your interest rate to as low as 2%, forgive/reduce part of the principal, or even extend your loan period to 40 years and lower your monthly payment.
Most importantly, don't skip your mortgage payments. If you are struggling to afford payments, the Home Affordable Modification Program (HAMP) can provide you with many of the solutions mentioned above.
There are also incentives like a principal reduction program that allows you to earn up to $10,000 in principal reduction just for making your mortgage payments in full and on time. You can earn $1,000 per year for the first five years and a $5,000 one-time payment at the end of year six.
When you're trying to save money on your mortgage but your interest rate is already low, downsizing is another option to consider.
Most people don't like moving and all the hassle that's associated with it. On the flip side, you may be able to rent for less if that's an option or get a smaller loan meaning you'll pay less interest. Downsizing and buying a smaller, more affordable home is an option to consider if you have enough equity built up in your existing will have a better chance at putting 20 percent down to avoid PMI.
Plus, with a smaller home, you can also downsize your possessions. There are several costs associated with selling your current home like getting a realtor, potential closing costs, repairs and inspection reports. However, if it makes fiscal sense and will help you secure a more affordable mortgage or cheaper living costs, it may be worth the effort.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917