When buying a home, most people opt to finance the purchase through a mortgage. Although many people choose a mortgage to finance a home purchase, some who have cash choose a mortgage over cash purchases and retain the money for emergencies or investments.
Even with these benefits, taking a mortgage isn’t an easy decision. A quick calculation of the amount of interest that comes with the loan can discourage you from the onset. However, there are several ways to reduce the money you pay as interest on your mortgage.
If you’ve taken a mortgage to finance a home purchase, below are five tips to help you save:
1. Refinance Your Mortgage
Another way to save on your mortgage is to refinance it. Mortgage refinancing allows you to pay the existing loan off and take a new one on better terms. Although refinancing fees may apply, this strategy can save you significant amounts if current interest rates are lower.
Nonetheless, calculate the potential savings against refinancing costs to ensure they are worthwhile in the long run. Refinancing works well for people who plan to live in a home for a long time.
2. Improve Your Credit Score
Maintaining a good credit score is the easiest way to save on your mortgage. Generally, getting a mortgage is hard if you don’t have a good credit score. If you succeed in getting one, you’ll be given high-interest rates. If your current credit score isn’t good, take time to improve it before taking a mortgage. Waiting until you have a good to excellent credit score allows you to get a mortgage at a reduced interest rate, saving you thousands of dollars in the long run.
3. Reset Mortgage Repayments
While paying extra installments reduces the principal mortgage amount and shortens the repayment period, resetting a mortgage lowers your monthly installments. For instance, if you have a 30-year mortgage, resetting it enables you to adjust the repayment amount downwards while maintaining the loan duration.
Although this strategy means an extended repayment period and more interest, it frees cash on your monthly budget. Mortgage resetting can be an excellent option for households that struggle with monthly repayments. Talk to a trusted advisor if you think you need to reset your mortgage repayments.
4. Increase Monthly Repayments
On the contrary, adding an extra amount to your monthly repayments reduces the loan repayment period while reaping huge dividends later. Considering the structure of mortgage payments, this strategy works well as the extra payment reduces the principal amount over time. This strategy is feasible, as long as you can shoulder a higher amount of monthly repayments.
In amortizing mortgages, lenders allocate a large portion of initial repayments towards loan interest so they can recover their money as soon as possible. As repayment progresses, the ratio changes and a big chunk of the repayment goes towards repaying the principal amount. Increasing monthly installment amounts enables you to repay a mortgage faster, reducing the interest amount.
5. Track Property Taxes
You can save on your mortgage by tracking property taxes and filing protests for disparities. Property taxes can add significant amounts to your mortgage each year. Since these taxes are computed by multiplying the property assessed value by the local tax rate, keeping tabs on property assessments can go a long way in keeping your tax bill in check. You can review the information in your property assessment letter to ensure its accuracy.
Including non-factual information like fireplaces or rooms that don’t exist can push your taxes up significantly. If you suspect your assessment may be overrated, compare it with similar properties in your area. Alternatively, get a private assessor to provide a second opinion and challenge the evaluation if you find disparities.
6. Avoid Private Mortgage Insurance
Another way to reduce mortgage costs is to eliminate private mortgage insurance. Private insurance adds hundreds of dollars to monthly repayment installments for most borrowers. However, the insurance only applies until the mortgage balance hits 80% of a home’s appraised value. Whether your property appreciates or you reduce the principal mortgage amount by making extra payments, canceling the private insurance can save you a considerable amount.
7. Modify Mortgage Terms
A loan modification is another easy way to save on your mortgage. If you’re experiencing financial difficulties, you can use this strategy to make mortgage repayment more affordable. For instance, you could negotiate for a longer loan repayment period or an interest rate adjustment.
However, you should convince your lender that you qualify for a loan modification. To qualify, you must provide detailed documentation to prove your inability to make current payments and take a trial to ensure you can repay the mortgage on modified terms.
A mortgage provides an easy way to buy a home for most people. However, this financing strategy comes at a cost depending on your credit score and interest rates. If you already have a mortgage or have plans to take one soon, applying the tips discussed above can save you money.