By 
If you have been working with a mortgage broker, you are now familiar with the 28% rule – or the rule that your home loan’s principal, interest, taxes, and insurance (PITI) should not exceed 28% of your monthly income.
Sounds easy, right? But what this actually means is that, for the next 20-to-30 years, nearly one-third of your household’s income will go towards mortgage payments!
Luckily, with the right strategies, you can reduce your monthly payments and save money on your mortgage – check these out below.
Shop Around When Choosing a Mortgage Provider
While there are ways to save money once you have secured a mortgage, the real savings start much before you sign your agreement!
For any purchase, shopping around can help you compare different offers and find the best one for your financial goals. But in the case of home loans, this is even more important, since your choice will impact your finances for the next two to three decades.
According to a 2018 large-scale study conducted by government-backed home mortgage company Freddie Mac, borrowers were able to save an average of $1,435 on their loan by getting an extra quote. And, those who got five or more quotes saved over $2,914 on average!
Additionally, shopping around can help you better understand the benefits and drawbacks of each offer, find the lowest interest rates and discount points, and get a feel of what that mortgage provider’s standards of customer care are.
Make Extra and Bi-Weekly Payments
Whether you have had a cash windfall or your financial situation has improved enough to allow for larger monthly payments, there is more than one way to reduce your interest rates and start paying down your principal:
- Make larger payments towards your principal – using yearly bonuses or tax refunds, you can make larger one-time payments towards your mortgage. But make sure to ask your lender to use this money towards your principal and not your interests!
- Set up bi-weekly payments – most borrowers make one payment a month towards their home loan. Switching to bi-weekly payments means that you will, in fact, make an extra monthly payment by the end of the year. This simple trick can help you reduce your loan term by 2 years and save you over $12,000 in interest over the life of your mortgage!
Reach the 20% Equity Threshold and Save on Your PMI
If you are buying a home on a tight budget, the chances are that you might not be able to build the recommended 20% down payment.
While there are plenty of financial schemes that help you access a convenient mortgage, a low down payment comes with a major downside: most lenders will require you to pay for your own private mortgage insurance (PMI) to secure the loan. And, PMI can increase your monthly payments by $30-$70 for every $100,000 borrowed!
You can avoid these extra charges by:
- Securing a 20% deposit before applying for a mortgage
- Eliminate your PMI as soon as you pay enough of your principal to hold 20% of your home equity.
If you are struggling to reach this threshold, consider investing in a new home with an above-ground pool and an indoor gym with appraisal – your home’s value might have changed and you might be closer to the 20% mark than you think!
Refinance Your Mortgage and Consider an ARM
Refinancing your home loan is a financial move that allows you to substitute your existing mortgage with a new agreement. If you hold equity in your home, your financial situation has improved, or the current interest rates are favorable, refinancing your mortgage can help you:
- Secure lower interest rates on the remaining of your loan
- Shorten your agreement
- Get extra cash deriving from the home equity you are currently holding
Additionally, while most borrowers opt for fixed-rate long-term loans, refinancing can help you take advantage of today’s low interest rate environment by switching to an adjustable-rate mortgage (ARM).
Increase Your Budget or Recast Your Home Loan
Generally, shortening the life of your mortgage and making larger monthly payments can help you reduce your cost of debt by keeping down interest.
So, if you are looking to save money on your mortgage in the long term, you should consider increasing your monthly budget by finding a side hustle and reviewing your bank statements to cut overspending.
Alternatively, you can make a lump-sum payment towards your principal and recast your loan to re-amortize your mortgage to the new, smaller borrowed amount.
Bottom Line: Work With a Financial Advisor
Of course, paying down your mortgage and saving money on your agreement’s terms should be high up on your list of priorities. However, don’t forget that other types of debt – such as credit card balance – have higher interest rates.
Working with a financial advisor can help you better understand what the smartest move for your situation is, refocus your priorities, and achieve better financial stability.
Comments