Know How to Save on Your Mortgage
July 2, 2018
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It may be the biggest purchase you ever make. Buying a home. And if you don’t plan out your approach to keeping the costs down, you may end up spending more than you’d like. Finding small ways to save can really add up with this investment.
This information isn’t just for the first-time home buyers. It’s also for those looking to save on their current mortgage, maybe you’re in the market for a second mortgage, investment property, or you’re getting ready to move.
Preparing ahead can cut out costly mistakes to help keep that money in your wallet and avoid shelling out more than you need to. Don’t have regrets about your biggest bill. Instead, know how to accumulate those savings with these tips I’ve laid out for you.
Location, location, location
Location is everything. Or is it? While it is great to live close to town, your friends, family, work, the freeway, or grocery store, you also pay more to do so. Try looking a little further outside of your target area. With the mindset that your mortgage will be your biggest purchase, a savings of $10k-$20k can shave off a few years and even more interest.
It’s important to weigh out all your wants, must-haves, and compromises to find out what is most important to you. As with everything, you have to do what is best for you and fits your lifestyle.
If you are in the market for a house, don’t just let your realtor handle all the fine details. Do your own research by checking out properties in your desired area and comparing those properties along with the price.
Offer what you are willing to pay based on your budget and the value the home brings you and your family. Just remember, you could be outbid at any point and have to be okay with that.
It’s easy to get stuck on a certain property or small features that can be more costly and not consider if those features can be added to another lower cost property. Be aware of things that are easily changeable like paint colors and flooring.
Initial Purchase Interest Rate
When you start looking for a mortgage, shop around for the best rate. It’s easy to use a bank your realtor recommends or your current bank because of your relationship.
Find at least three options for rates and pick the best terms looking at all fees and closing costs. I wouldn’t get too caught up on the bank itself as your mortgage lender could potentially sell your mortgage to another lender at any given point.
The mistake I made with my first loan is going through my employer to receive a small discount and not shopping around with other banks to see all of my options. Always shop around for rates.
Check out Bankrate if you haven’t already. It’s a great tool I use myself to compare the best rates, fees, and terms offered by various banks.
Have rates gone down since you took out your loan. If they are even a quarter of a percent less than what you currently have, it may be worth it to refinance. The best way to find out is to speak with a mortgage loan officer and run an amortization schedule with both your current rate and your new rate.
This will tell you how much you will be saving with the new rate. If the cost to refinance is lower than the savings for the new rate, it may be time to refinance.
Here is the calculator I use to view an amortization schedule. It’s such a valuable tool if you’re interested in applying extra principal payments and are curious to see the amount of interest you pay go down.
You could always have your loan officer contact you if rates go down or you can try to set up an interest rate notification. There are some Twitter profiles that will tweet out current rates like @ERATE. I’ve also set up a Google alert with the keywords “mortgage rates”.
Mortgage insurance is most often required when you put less than a 20% down payment on a conventional or FHA loan. You might see the terms MIP or PMI. MIP stands for Mortgage Insurance Premium while PMI is Private Mortgage Insurance. MIP is on FHA loans and PMI is on conventional loans.
Now, the hard part. This is not insurance for yourself. The money you pay each month or upfront protects your lender in the event you would default on your loan. I have seen mortgage insurance payments upwards of $500 monthly on some loans. It’s an empty cost for the borrower as it doesn’t offer any benefit to you.
This is one reason you hear about saving up until you can put 20% down on your mortgage. Who wants to pay a cost that helps the lender if you default? If you can’t save up the full 20%, put as much down as possible and look at having it removed when your loan meets certain requirements. For an FHA loan, that could be a minimum of 5 years before it could be removed.
Do you get paid biweekly? You could save thousands on your overall mortgage costs by paying your mortgage biweekly through your lender. Some lenders can set you up on an autopay that pulls half of your monthly payment out every two weeks.
How does this help you save? Your extra check that you get twice a year now goes toward your mortgage. It equates to making one full extra payment on your mortgage a year! Which is huge! If you’re looking to also payoff your mortgage early, this would definitely help.
Ask your lender about a recast
Recasting allows you to lower your mortgage payment by putting extra money toward the principal balance while keeping the interest rate that you currently have. Not all lenders offer this so your first step is to check with your lender.
Lenders may also choose not to advertise this option. There is typically a fee of a couple hundred dollars and there may be a minimum principal amount required to do the recast.
Take a closer look at taxes
Pull up cities throughout your target area and look at the property tax rates. This is a good step if you are in the market to purchase.
I pulled up rates in my local area and the differences were astounding. A few cities were as much as $3 more than other cities. As far as the highest and lowest rates, the difference was just shy of $8. Having an idea of tax rates in surrounding cities can help you choose a city that is more cost effective.
Calculation for your property taxes can vary by your taxing authority. If the information isn’t on your bill, I recommend calling to find out how your taxes are or will be calculated.
Check with your taxing authority for any credits or exemptions that you can get back. If you feel the value of the property is not accurate, it may be time to dispute your taxes. This can seem daunting especially if you have never done it before, but could be well worth it in the long run.
Just because you are in a 30-year mortgage or 15-year mortgage, doesn’t mean you have to wait that long to pay it off. The sooner your mortgage is paid off, the less overall interest you will pay.
Some mortgages do have a pre-payment penalty fee which should be indicated on your promissory note from closing so be sure to check that before you kiss your mortgage goodbye.
Making additional payments to the principal balance as your income increases, your annual bonus is received, or you get your tax refund back is a great way to cut a year or more off your overall term.
Use the calculator above to view your amortization schedule with making principal payments to see how it impacts your loan term. Putting an extra $100 a month on the principal balance shortened my loan term by over four years!
How do you save on your mortgage? Feel free to leave me a comment and follow me for more money saving tips.