Buying a home is one of the most expensive purchases of a lifetime. Most buyers opt to borrow money from lenders to purchase their properties, locking themselves into potentially 30 years of mortgage payments. Not only are homes costly, but loans are too. Interest is the price borrowers pay their lenders for advancing them money, and it’s due until the loan is entirely paid back. Even though interest rates recently declined benefitting borrowers, there are a few additional ways homebuyers can save money on their mortgages.
1. Make a Large Down Payment
Prospective homebuyers searching for affordable mortgages should start by evaluating their home budgets. With less expensive properties, buyers assume smaller loan sizes and cheaper monthly payments. Additionally, more affordable homes allow buyers to pay larger down payments. Down payments of at least 20 percent of the purchase price of the home save borrowers money over the long-term. When a borrower pays less than 20 percent toward the home purchase, the lender accepts more than 80 percent equity in the home. Lenders who assume that level of risk require borrowers to pay private mortgage insurance (PMI) to protect the lender’s investment. Some lenders require borrowers to pay PMI upfront, but generally, it’s rolled into monthly mortgage payments.
2. Monitor Equity to Cancel PMI
Homeowners who are currently paying PMI should assess their loan terms and payment balances. When PMI is not paid up-front at closing, it’s paid for a fixed time period or until the borrower pays 20 percent of the principal of the loan. When borrowers owe less than 80 percent of the appraised value of the home, then they can petition their lenders to cancel PMI. Lenders may require homeowners to pay for property appraisals before canceling PMI. Keep in mind that monthly payments are amortized, so the majority of early-ownership payments directly reduce interest, and later payments reduce more principal. Therefore, it may take years before borrowers own 20 percent of the value of their homes, depending on the size of their initial down payment. However, when the loan is paid down to 78 percent of its original value, the PMI will be automatically terminated.
3. Pay Extra Principal
One way to save money on a mortgage is by eliminating some interest payments. Borrowers can pay down their principals faster than their loan terms require to avoid some interest costs. Homeowners who earn commissions checks, gift money, large tax returns or other lump sums can apply it toward their principals. Recall that amortization schedules allocate the majority of initial payments toward interest balances. Therefore, principal prepayment saves borrowers more interest costs the earlier it’s applied.
4. Enroll In a Bi-Weekly Payment Program
Homeowners who opt to save money on their mortgages by prepaying their loans might find it difficult to accumulate large sums to apply toward their principals. One option is to enroll in a bi-weekly payment program. Instead of one full-payment each month, bi-weekly programs collect one half-payment every two weeks. These payments often align better with a homeowner’s income. With 52 weeks each year, homeowners end up paying 13 full-payments annually. Monthly mortgage payments only collect 12 payments each year. Enrolling in bi-weekly programs arranges for buyers to make one extra full-payment each year, saving them interest costs. However, bi-weekly programs cost $150-$500 for initial activation and $5-$20 upon receipt of each check.
5. Recast the Mortgage
Another way for homeowners to save is to recast their mortgages for lower monthly payments. A recast allows homeowners to apply a large sum of money toward their principals, eliminating some interest costs. Lenders then recalculate the remaining costs of interest and principal for the existing length of the loan. If owners have savings, inheritance or other lump sums of money, they can apply it toward a mortgage recast. Typically, lenders require homeowners to apply at least $5,000 to their loans for a recast. Lender fees for a mortgage recast are less expensive than refinancing fees. Though, not all lenders allow loans to be recast.
6. Refinance the Mortgage
Interest rates decreased throughout recent years, making mortgage refinancing a significant savings opportunity for homeowners. When borrowers opt to refinance at lower interest rates, total interest decreases, which reduces monthly payments. Unlike recasting, refinancing resets the length of the loan. Additionally, lenders charge numerous fees for refinancing. Borrowers considering mortgage refinancing should calculate the total cost of refinancing versus their monthly savings.
Some homeowners prefer to keep their assets liquid, invested, applied toward higher-interest debts or saved for children’s future schooling. If homeowners’ financial priorities are to pay down their mortgages and save money in the process, these are six beneficial tips to attain that goal.
BIO: Tali Wee is a blogger for Zillow and other partners. She writes about home-related topics such as home improvements, interior design on a budget and financing mortgages.