5 Ways to Save Thousands in Mortgage Interest
It’s common knowledge that you’re going to pay interest when borrowing money. When it comes to home buying, you may not realize just how much interest you will be paying.
Say you’re approved for a $300,000 30-year mortgage with a 4% interest rate (4.41% APR). If you make your monthly payment as required, then you'll wind up paying a total of $215,609 in interest over time. That’s almost as much as your loan principal!
It may sound scary at first, but we have a secret. Did you know there are ways to save money on mortgage interest? It's true. Read on to learn five of the most popular ways to accomplish greater long-term and overall savings.
1. Bi-weekly mortgage payments
Making a payment every two weeks adds one all-principal payment to your mortgage each year. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year. The extra payment you make each year is applied to your principal, so your interest also decreases with each reduction in principal. Plus, the more principal you pay, the quicker you build equity in your house.
The conventional logic is that increasing the frequency of the payments doesn't allow interest to build up and throughout a 30- or 15-year mortgage that can equal years eliminated from your loan.
Just be sure your mortgage servicer allows you to make bi-weekly payments, and it doesn’t add fees to your statement for making them. Those fees can add up, resulting in little to no benefit for you. Along that same line, be sure to ask if your bi-weekly payment is applied upon receipt, or if it’s held until the end of the month (or even the end of the year). The actual benefit of bi-weekly payments is when that amount is applied upon receipt.
2. Extra mortgage payments
Even if you don’t set up a bi-weekly plan with your servicer, you can accomplish the same goal of saving money on mortgage interest by making one extra mortgage payment a year on your own; or dividing your monthly payment by 12 and adding that amount to your payment every month. Either option can help you pay down your loan faster, saving thousands in overall interest.
The former option allows you to choose if and when you pay extra toward your mortgage loan. Say you receive a large tax refund or performance bonus from work — it may be worth putting some (or most) of it toward your loan principal. This allows you to save significant money while taking years of interest payments off your loan, depending on how much you’re able to spend.
The second option of putting more money toward your monthly payment can also result in incredible savings. Let’s consider this example. Say your original loan amount is $400,000. You’ve committed to a 30-year conventional loan at a 4% interest rate (4.41% APR). Not considering escrow, your monthly payment usually is $1,910. But if you can put an extra $100 toward your monthly amount, you may be looking at $29,801 in total savings. This would help you pay your loan off two years and eight months faster!
3. Drop Private Mortgage Insurance (PMI)
If you financed your home with a conventional mortgage, but you did not put down 20% of the purchase price, chances are you were hit with PMI. It may not have seemed like a big deal at the time since it got you into your dream home for less money down. But now that you’re a few years into your mortgage, that cost may be adding up.
Here’s the good news. You can ask your lender to cancel the insurance as soon as your mortgage balance falls below 80 percent of the home’s appraised value. This can happen if your home’s value has gone up or you have repaid some of the principal. It requires an appraisal to confirm your home value, but once that’s done (and has verified you meet the threshold), you can be PMI free.
4. Recast your mortgage
Recasting, also known as re-amortization, happens when you pay down a significant portion of your home loan and decide to “recast” your existing loan. You’re altering the mortgage payoff process. This involves a new loan term length but not a “new loan” or loan type as with a traditional mortgage refinance. Your monthly principal and interest are recalculated, so you end up with a lower monthly payment over the existing term of the loan.
5. Streamline refinance
If you have a government-backed loan, you may want to look at a streamline refinance. A streamline refinance allows you to take advantage of a lower interest rate and lower monthly payment. Plus, there are lenders who will work with you to lower your rate without resetting your term. At American Financing, for example, there are custom loan options that can be written into 8, 14, 19-year terms — whatever is needed. Because if you’ve been paying for 6 years, you should be able to refinance to a 24-year loan. It’s simple. It’s an easy way to save, and it’s customized for you. If you’re in a conventional loan, you have a similar option called a rate-and-term mortgage refinance. You’re able to change your mortgage rate, your loan term, or both. And since you aren’t cashing out, you will likely receive a lower, more competitive interest rate. And as mentioned above, when working with American Financing, you’ll be provided with custom loan options that don’t reset your loan term. It’s your term, your way.
- Remember, you're charged interest based on your outstanding principal. The sooner you can pay down your principal, the less interest you’ll be charged.
Tip: Check out mortgage payments explained to learn how your loan amortizes.
- Though it’s often a valuable cost savings’ option, refinancing is not for everyone. Be sure to ask yourself a few questions about what you hope to accomplish before you make any significant loan changes.
- Working with a salary-based mortgage consultant allows you to see all options available. You’re not pressured into a specific loan program that may not fit your financial goals.