Mortgages are a good thing; after all, most of us would never be able to buy a home without one, even in the most affordable markets. But when you sit down, crunch the numbers, and see exactly how much interest you’re paying on your loan, having a mortgage can sometimes feel a little oppressive. And we haven’t even mentioned the 30-year commitment.
But the good news is that there are easy ways to drastically shorten that term, and shave tens of thousands of dollars off the interest you end up paying. Here are ten easy ways you can get that mortgage under control, so it doesn’t control you.
1. Make extra payments
If you can scrape together the money to make an extra mortgage payment (or two) per year, it will pay huge dividends down the line. That’s because your extra payments go towards your principal, not interest. And since it’s taking down the balance of your principal, you’ll also pay less total interest.
This strategy is especially powerful considering how mortgage payment programs are structured; in the early part of the loan, the large majority of your mortgage payment is going towards interest – paying the bank, in other words. That’s because every mortgage is a risk, so they want to get their money as soon as possible. This ratio shifts over the life of the loan, until, at the very end, most of each payment is actually paying down the principal. This is known as amortization, and you can use simple calculators to figure out how much you pay in interest vs. principle. Your mortgage balance doesn’t go down steadily, at an even pace; it’s a gentle slope that, towards the end, plummets almost straight down.
Making extra payments, early in the life of the loan, helps take down that principal far faster than it would otherwise decrease.
2. Eliminate your PMI
If you put less than 20% down, your lender probably requires you to carry private mortgage insurance (PMI). This adds hundreds of dollars to your monthly budget, but the good news is that you only have to carry it until your mortgage balance reaches 80% of your home’s appraised value. Whether you get there by paying down the principal (hopefully by making those extra payments) or through appreciation, you should contact your lender to cancel your PMI as soon as you reach that threshold.
3. Recast your mortgage payment
Remember when we said that making extra payments is a great way to reduce your principal? Typically, when homeowners reduce their principal faster than scheduled, it shortens the term of the loan; you’ll pay off in, say, twenty years instead of the full thirty. But there’s another way you can play it.
Recasting, or resetting, your mortgage preserves the term of your mortgage, and instead adjusts the amount of your mortgage payment. So instead of paying off in twenty years, you’ll pay for thirty years, but your monthly payment will go down – significantly, in some cases. Going this route can free up a lot of cash for your monthly budget.
Of course, the downside is you’re paying off the mortgage longer and pay more in interest. However, for households struggling to make monthly payments, it’s a good option.
4. Challenge your property assessment
Property taxes are the bane of every homeowner’s existence, a nuisance that can total thousands of dollars a year. Since your property taxes are calculated by multiplying the local tax rate by your property’s assessed value, the best way to keep your tax bill under control is to closely monitor your property assessment.
When you receive your assessment letter, immediately go over the basic information and make sure they’ve got everything right. Even something as small as adding in a nonexistent room or fireplace can drive up your assessment. If you think your assessment is too high, look at comparable properties in your area, and check their assessments. You can also hire a private assessor to give you a second opinion.
Just remember: if you decide to protest your assessment, move quickly. Most municipalities have a time limit on how long you can enter a challenge.
5. Refinance
Refinancing your mortgage to a lower interest rate can help you dramatically lower your monthly payment; just keep in mind that you’ll have to pay refinancing fees. Carefully calculate your savings against the money you’ll have to spend to refinance, to be sure that you’re coming out ahead in the long run.
Looking to refinance your property? Compare rates to find your best option.
6. Loan Modification
If you qualify for loan modification, you’ll be able to change the terms of your mortgage to make it more affordable. You could potentially lengthen the term of the loan, or even lower the interest rate or the principal balance.
The catch? There is none, except that not everyone is eligible. Loan modifications are intended for people who are going through financial hardships. To successfully modify your loan, you’ll have to provide extensive documentation proving you can’t pay your current mortgage, and possibly even go through a trial period to make sure you can pay the mortgage on its modified terms.
7. Downsize Your Home
Although this is a big step, selling your home and using the cash to downsize to a less expensive home could get you completely out from under your debt. Since your subsequent home is ideally going to be funded entirely by the sale of your present home, you’ll want to find ways to hold onto every penny possible. One easy way to do that is to use a low-commission discount broker; after all, the 6% standard commission is almost always the largest single expense for home sellers.
Even if you have to take on a small mortgage on your new home, you’ll still have significantly improved your financial situation.
8. Use Your Home to Pay Off High-Interest Debt
Your home doesn’t have to be an end – it can also be a means. If you’re carrying a lot of high-interest credit card debt, it may not make sense to throw extra money at your mortgage. After all, while you’re paying down your relatively low-interest mortgage, your high-interest debt is racking up interest. You’ve got to look at the big picture.
One way to address this kind of situation is to do a cash-out refinance. You’ll get a lump sum of money that you can use to pay off your high-interest debt, basically consolidating it and folding it in under the much lower interest rate on your mortgage.
9. Explore an ARM
If you aren’t planning to stay in your home for the long run, switching to an Adjustable Rate Mortgage (ARM) could pay big benefits. An ARM offers a very low-interest rate for the first five years, and then switches to a variable interest rate that’s pegged to the prime rate. But if you’re not planning on staying in your home for longer than five years, that eventual uptick won’t matter, and the lower initial rate can save you hundreds of dollars a month.
10. Budget, Budget, Budget
There are plenty of ways to save on your mortgage that don’t strictly involve your mortgage. Carefully cutting all the fat out of your monthly budget can yield several hundred dollars a month more that you can put into extra loan payments. How? Some popular budget-crunching methods include taking your lunch to work, making coffee at home instead of going to Starbucks, and canceling monthly subscriptions. Although it might sting a little now, it will pay off big in the long run.
