Home Loans - how can I save money?
Thursday May 24, 2012
The first thing you have to know about me is that I have never – will never – pay more than I have to. For anything. If I’m going out to dinner with my family, you better be sure I’m going to have a coupon in hand for our restaurant of choice. Same goes for my grocery list: I refuse to pay full price. I’ve taken that motto and run with it into other sectors of my life. I routinely shop around for the lowest health, car, and life insurance rates; I switch my homeowner’s insurance policy regularly; I’ve been a member of three different health clubs in the past four years, simply because I was willing to jump ship for the best deals.
For some reason, I never embraced the same mantra when it came to my mortgage. While shopping around was easy enough when it came to insurance policies, fitness memberships, and groceries, I thought – surely – it was too complicated a process for my mortgage.
I was wrong.
Money-Saving Tactic #1: Bi-Weekly Payments
Let’s say you’re not willing to go through the process of refinancing your mortgage. It’s ok, I get it: it’s a headache. But there are still ways you can reduce the amount of interest you’ll pay over the life of your home loan without changing the terms of the loan itself.
The first – and perhaps least well known – is increasing the frequency of your mortgage payments. Whether you have a 30 fixed or variable loan, you probably make monthly payments. There are plenty of reasons why this is the traditional route for most homeowners: it makes it easy to manage your monthly budget with a once-a-month payment. Plus, lenders typically send out monthly payment reminders, rather than weekly or bi-weekly stubs. But consider this: simply by cutting your usual monthly mortgage payment in half, you can shave thousands of dollars off your loan – and pay it off years in advance, too.
How? Let’s say you took out a 30-year loan for $200,000 at an interest rate of 4.5 percent. You pay about $1000 a month on the loan. Instead of paying in one lump sum, split it up into two payments of $500 – send one on the first of the month, the other on the 15th. A home loan repayment calculator can show you exactly how much you’ll save – for our example, you’ll be able to shave nearly $30,000 in interest payments off the life of your loan, plus pay it off after 26 years instead of the full 30.
Money-Saving Tactic #2: Pay Down Your Principle
Let’s keep using our example of the $200,000 30-year loan at a 4.5 percent interest rate. Now, let’s say you’re terrible with scheduling, and know that remembering to send bi-weekly mortgage payments won’t work for you. How can you save?
Simple: send extra money whenever you remember.
For example, by paying an extra $1200 a year – just $100 a month - on that $200,000 home loan, you can shave off three years from your 30-year term (and nearly $20,000 in interest) if you started making those extra payments five years in. Start from the day you take out the home loan, and you can shave off another year and a half – and another $11,000.
Money-Saving Tactic #3: Refinance Your Loan
This is the granddaddy of mortgage savings – but it also comes with the biggest headache. A home loan calculator can show you just how much you stand to save with a refinance. For example, let’s say you wanted to refinance that 30-year loan at 4.5 percent down to a 30-year loan with a 3.5 percent interest rate. If you’d been making just the standard mortgage payments for the first five years of your current loan, you’d still owe – and would be refinancing – about $182,000. Simply shaving off that one percentage point could put $192.00 a month back into your pocket, and cut your interest payments by nearly $10,000 over the life of your loan.
The drawback? Refinancing usually comes with a slew of fees, like possible exit fees, establishment fees and sometimes even lenders mortgage insurance, even if the original loan didn’t require LMI.
Money-Saving Tactic #4: Three Is A Magic Number
And it’s a magic number for a reason: by combining all three of the tactics outlined above, you could boost your bottom line even more. Lowering the interest payment will reduce your monthly expenses, giving you more wiggle room to make extra payments on your loan’s principle – and making your loan payments bi-weekly is just icing on the cake.
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