Cutting small expenses from your budget can make a difference, but the best way to make a large impact on your household spending is to hack your mortgage expenses. Because a mortgage is the largest expense for many American households, taking these sneaky steps to reduce your mortgage terms can save you thousands of dollars over the life of the loan. Here are 5 Mortgage Expense Hacks.
Mortgage Expense Hack #1. Pay Your Mortgage Twice a Month
Instead of making one payment for the total due each month, split your payment in half and pay the mortgage every two weeks. This works great if you are paid every two weeks because then you know exactly how much of your paycheck is going toward housing and your cash available is the same every time rather than a big chunk going toward the mortgage every 2nd paycheck. If your mortgage company has this option it will save you interest and cut years from the life of the loan because you end up making 26 half payments or the equivalent of 13 monthly payments a year. You also end up making half the monthly payments 2 weeks early so you save the interest on that half. Before signing a mortgage, make sure that there’s no prepayment clause, which means you’ll have a fee if you pay the mortgage off early. If you don’t sign up for an official every two-week payment plan from your bank and just make the half payment early it might not be credited properly to save you interest but you avoid any extra fees.
Mortgage Expense Hack #2. Challenge Your Home’s Valuation
This isn’t exactly saving on your mortgage but if you suspect that your home has dropped in value, you can request a new property tax assessment from the city or county to reflect this change. If an adjustment is granted, it could save you hundreds or even thousands of dollars per year on taxes.
Mortgage Expense Hack #3. Look for an 80/10/10 Program
The best way to get premium mortgage terms is with a 20 percent down payment. But if that’s a stretch and you have good credit, some banks like State Bank of Cross Plains offer a program that allows you to borrow 80 percent on one loan and 10 percent on a second, with a 10 percent down payment. This allows you to avoid PMI, or private mortgage insurance, required on loans with a smaller down payment. This could mean a savings of up to $1,400 per year. Also if you pay extra principal on the smaller loan whenever you have spare cash you can pay it off faster. Once you have the small loan paid off, you can take the amount you were paying toward the smaller loan and put it toward the larger one and pay it off faster as well.
Mortgage Expense Hack #4. Pay Extra to Get Rid of PMI
Private mortgage insurance is not a fixed cost for the life of the loan. Federal law requires that PMI may be dropped if your mortgage payments are up to date and the equity in the home is equal to 20 percent of the original purchase price. That means that paying extra money toward the principal in the early life of the loan can help you more quickly reach the point where PMI is no longer required. This strategy can save you hundreds a month. The trick here is you have to request that it be dropped when you reach the 20% equity point, the bank won’t do it automatically.
Mortgage Expense Hack #5. Refinance When Interest Rates Drop
The “rule of thumb” is that it generally pays to refinance whenever you can reduce your interest rate by 1%. Refinancing involves closing costs which either have to be paid “out of pocket” or rolled into the new loan. Fortunately, refinance closing costs are less than original closing costs but they still might be a couple of thousand dollars. However, sometimes banks will offer discounts or rebates in order to get your business. Currently, mortgage rates are at historically low levels so if you have had your mortgage for a while it might pay to look into refinancing. For instance, if your original mortgage was at 4% for 30 years on a $200,000 loan you would be paying about $965 for Principal & Interest (P&I) plus property taxes, Hazard insurance and maybe PMI. Fifteen years later you would still owe $129,000 and have paid over $100,000 in interest.
If the going refi interest rate at that point is 3% you could refinance. If you took out a 15-year mortgage at 3% for the $129,000 you new Payment would only be $890.85 for P&I saving you almost $75 a month. If you are able to knock off the PMI at the same time it will save you even more. If it costs you $1500 in closing costs it will take you 20 months to break even. However, if you are able to put another $5,000 toward your mortgage and only borrow $124,000 your new monthly payment would drop to $856.32.
If you are better off financially than you were when you first took out the loan you might consider reducing the life of your loan. So when you refinance rather than taking out another 15-year loan, you could try taking out a 10-year loan instead. $129,000 at 3% for 10 years would require a monthly payment of $1,245.63 P&I but would knock 5 years off your mortgage and save you almost $11,000 in interest over the life of the loan. Although the refinance charges would reduce the savings you would be mortgage free five years earlier. And since you were in the habit of paying the mortgage you could start saving an additional $1,245.63 per month!