The joys of owning a home often get dulled by the pressure of paying a mortgage. The amount can vary depending on the total amount and duration of the mortgage, but it eats up a large chunk of the monthly budget for everyone. If you’re a new homeowner worried about paying mortgages, we have good news. There are several ways to save money on your monthly mortgage payment which can reduce the overall cost of your mortgage. Below, we have listed seven such strategies. Let's take a look.
Choose a shorter-term loan
A shorter term might sound frightening to you as it requires you to pay more interest every month. But since the overall duration of the loan is shorter, you pay much less in interest overall and save more in the long run.
However, consult your budget to ensure that you can accommodate the short-term interest amount as they tend to be higher. You might also have to pass a rigorous screening process to be eligible for one. But once you do the math and the amount of money you get to save, the process seems worth it.
Choose a fixed-rate mortgage
A fixed-rate mortgage is a better option than an adjustable-rate mortgage. The interest rate stays fixed in the former, whereas the interest rate fluctuates based on the market condition in the latter. With a fixed-rate mortgage, your expenditure is stable and certain, and your budget remains unaffected. Moreover, fixed-rate mortgages often come with lower interest rates than adjustable-rate mortgages. This also helps with your long-term savings plan.
However, research well before choosing this option, especially if you're planning to sell your house in the future. In that case, an adjustable-rate mortgage will be better suited for you.
Refinance your mortgage
Refinancing your mortgage is another effective way to save money on your monthly mortgage payment. Refinancing a mortgage means taking out a new loan to pay off your existing mortgage. By doing so, you can negotiate a new interest rate and loan terms, which can result in lower monthly payments and long-term savings.
Research well and check your financial condition before deciding to go for this option. Many factors will affect your eligibility, such as your credit score, your intended duration of stay in this house, and the refinancing fees. Find the best interest rates and loan terms to reduce the chances of potential losses in interest.
There are usually two types of refinancing: rate-and-term and cash-out. “Clearly there are different goals borrowers have in mind, as well as qualifications to meet when deciding between these two types of home loan choices,” says Option Funding Inc, a Westlake refinance company.
Make extra payments
Making extra payments might not be your favorite option, but this reduces the amount of interest you pay over the life of your loan. Since you’re paying more than the required amount, you’re paying off your mortgage faster. This leads to long-term savings in the interest amount.
Consult your budget to figure out what kind of extra payment you can afford. You can pay a fixed extra amount every month or pay a lump-sum amount whenever you have access to that money. It could come from any valid and legal income source.
However, some mortgages have prepayment penalties or restrictions on extra payment. So, check with your lender to see if you’re allowed to pay extra.
Increase credit score
A credit score is an important factor in determining your eligibility for a mortgage. Your interest rate is also based on it. A higher credit score will fetch you a lower interest rate, whereas a bad or low credit score will get you a higher interest rate. Try to increase your credit score by paying bills on time, reducing loans and all debts, and keeping your credit report error-free. This can take some time, but once you obtain the required credit score or a positive credit report, you can enjoy a lower interest rate and save thousands of dollars in mortgage over the duration of the loan.
Appeal to lower your property taxes
Property taxes can vary based on the value of your property. If your property has been overvalued, you’ll end up spending more on your monthly mortgage payment. In that case, you can appeal to have your property taxes reduced and save some money on the interest payment. Collect evidence that indicates an overvaluation - such as documents of recent appraisals or assessments of similar properties in your area.
The appeal can take some time and require an attorney or a professional. Do your study and be patient throughout the process. The appeal process, eligibility, and required documents can vary by state or location, so check with your local authority to understand everything thoroughly before appealing. The more accuracy, the better the chances of getting approved.
Eliminate Private Mortgage Insurance
Your lender might require you to buy Private Mortgage Insurance or PMI if your down payment is less than 20% of the total value. A PMI protects the lender in case you ever default on your loan. But it ends up adding an extra cost of around 0.3%-1.5% of the loan amount to your monthly mortgage payment. Needless to say, you pay a lot more in interest under such circumstances. One way to reduce this amount is to eliminate the PMI. The easiest way to do this is to make a larger down payment than 20%. You can also turn your loan-to-value ratio to 80% or less to have the same effect. Your lender might have other specific requirements for removing the PMI, so check with them to increase your chances.
You can definitely buy your home frugally, but end up spending a lot more in interest if you don’t have enough knowledge about the loan terms and added expenditures. You can follow some or all of the abovementioned strategies to reduce the interest amount and save a significant amount of money.