6 smart — but simple — ways to save thousands on your home loan
For many people, the biggest check written every month covers keeping a roof over their heads. If that's a rent check, there's not much you can do to decrease the amount you have to pay monthly. If it's a mortgage payment, there are some things you can do to shave off some costs and possibly pay off your home even faster.
As we've written before, your home is more than just a place to live. It's an investment that, when used properly, can set you up nicely for retirement, take the edge off of large expenses or even help pay off accumulated debt, like student loans and credit cards.
6 ways to shave the interest paid on your mortgage
1. When looking for a lender, comparison shop
As a general rule of thumb, comparing home financing quotes from at least three lenders makes sense. (This is good advice for any significant transaction, btw.) It's a pretty bold move for a mortgage company like us to suggest you shop around, but we want to make sure you're comfortable with the deal you're getting from Movement, so go for it!
Before selecting a lender, remember that interest rates are likely to change between your original quote and the date you lock in on your home loan. It pays to ask one lender to match or beat a lower rate offered by another.
2. Pony up a larger down payment
While several home financing options are available with low (or no) down payment, saving for a larger down payment can really pay off — even though saving more is very hard and takes time. Why is it better to put down more? Because if you put down more, you're actually borrowing a smaller amount.
But there are other benefits to putting down more. Private mortgage insurance (PMI) may be part of your monthly payment if your down payment is less than 20%). Putting down 20% of the home price (or if the home equity you build reaches that percentage), may be able to get you out of paying those pesky PMI premiums.
Just remember, there are exceptions. If you've served in the military, you may qualify for a VA loan, which doesn't require PMI. The same is true for a USDA loan, which helps low- and moderate-income families purchase homes in rural areas of the country. If you have no choice other than to take out a loan with PMI, ask for one with terms that allow you to cancel as soon as you have 20% equity in the house or an loan-to-value ratio of 80%.
3. Consider making bi-weekly payments
What would happen if you made 50% of your mortgage payment every two weeks instead of 100% every month? You'd pay your mortgage down faster, that's what! With 52 weeks in a year, making a half-payment every two weeks — 26 in all — means you'll end up making 13 monthly payments instead of twelve. That's an entire extra payment made without even thinking about it.
In the early years of owning a home, most of the monthly payment is applied to interest (not the principal). So, making bi-weekly payments from the get-go could reduce the term of your mortgage by several years and dramatically slash the interest paid over the life of the loan.
Check with your lender first to see if there are any fees associated with a bi-weekly payment schedule. If there are, do the math to determine if prepaying your loan makes sense for you.
4. Pay a little more off the principal every month
Can't pull off paying the mortgage biweekly? Not a problem. Instead, pay a little extra every month and direct that amount towards the principal. Try adding 1/12 of your monthly payment every month. It may not seem like a lot, but it really adds up over time!
For each year you keep that up, you will have paid one extra month's worth of payments. That can shorten your loan by several years based on a 30-year term and save you thousands in interest.
If you can't come up with that extra payment, try going for $50 extra a month — that's the equivalent of cutting out a caffe latte from Starbucks or Dunkin every other day. Just make sure it's paid towards the principal balance to shave off years and thousands in interest! C'mon, you got this!
5. Park your annual bonus into your mortgage
Maybe you can't swing the bi-weekly payment plan or a little extra every week. We get it; things can be kinda tight these days with inflation. Instead, maybe you find yourself flush with a little extra cash every now and then — like an annual bonus from work or a tax return from Uncle Sam. If that's the case, pay it forward — to yourself!
Adding a one-time lump sum to the principal can have the same effect as the above options! It may be a little less predictable and may not happen year after year, but at least it's something!
6. Cut the term in half
According to Freddie Mac, 90% of home buyers choose a 30-year fixed-rate mortgage. By stretching the time you have to pay the loan back, you'll have lower monthly payments. That makes the 30-year fixed so attractive.
Flip the script, though, and you could do much better financially. A 15-year mortgage is often seen as less risky because you're on the hook to pay off the loan sooner. With less risk comes lower interest rates. But since you only have half the time to pay it off, you'll pay more every month, which can be tough to swallow for many Americans. If you can afford the higher monthly payments, though, you'll build equity quicker, save thousands of dollars and end up owning your home that much faster.
The thrill of it all!
It's easy to get caught up in the thrill of buying a new house. What's not thrilling is thinking about the monthly payment you'll have to make, how long you'll be making those payments and how much interest you'll be paying over the years. It could be in the tens of thousands of dollars, depending on the interest rate and size of the mortgage.
Follow a few of our six tips and you can save big over the life of your loan. Just keep in mind that if you don't think you'll be in your home for at least ten years, some of these tips might not go as planned. Reach out to a local Movement Mortgage loan officer to go over your particular situation! And good luck in your next new home!
