Now that I am the proud owner of a new mortgage of my rental property, I’ve been thinking about how quickly I can pay this loan off and reduce my mortgage costs. What I’ve realized is that paying off a large loan such as a mortgage can seem decades away, but if you apply a few strategies, not only can you pay your mortgage off faster, but you can save thousands of dollars in the process.
I’m all about having this as simple as possible, so I looked for the easiest ways to get both of these tasks accomplished. Today I present you with six simple ways to reduce your mortgage costs. Let me know which one you might try.
Shop Around For Mortgage Companies
If you don’t have a mortgage and are in the market for a new house, this is the time that is pays to shop around and compare home loans. You’ll want to cluster mortgage pre-qualifications and loan applications around the same time so that your credit score does not suffer. Just as you shouldn’t purchase the first house that you see, you shouldn’t accept that the bank that holds your checking or savings account will have the best offer. Sometimes the best deals can be found online or through small community banks. Check out bankrate.com (USA), moneysupermarket.com (UK) and iSelect (Australia) to compare some home loans. It is really easy to compare home loans using these services and should not take more than 10 minutes.
Refinance Your Mortgage, Like Right Now
I know that you’ve heard this one about a million times, but if you have a mortgage and are paying anything above a 4.5% interest rate, then you should begin shopping around for a new mortgage. Not only are mortgage rates historically low right now (hovering around 3.7% for a 30-year fixed rate mortgage and 2.95% for a 15 year mortgage), but you can also negotiate things such as points, fees and closing costs.
Pay Your Mortgage Bi-Weekly
You don’t have to have an official bi-weekly mortgage to save thousands of dollars in interest payments over the life of your loan. It basically works this way; instead of paying your mortgage once per month, pay half of your mortgage every two weeks.
Once you add everything up, you will have made 26 payments or about 13 monthly payments per year and those extra monthly payments can add up to big savings over time. Here’s an example of how this could work:
Original Loan Amount: $100,000
Interest Rate: 4%
Loan Term: 30 years
One payment per month: $477.42
Bi-weekly payment: $238.71
You will pay $71,869.51 in interest and the loan will be paid off in 30 years under the original terms. If you paid the loan bi-weekly, you will pay $60,180.16 in interest and the loan will be paid off in 25 years. If you’d like to learn more about bi-weekly mortgages, check out my primer on that.
Toss Small Extra Payments onto Your Mortgage
Sort of the same as paying your mortgage bi-weekly, small additional payments can add up to huge savings over time. If we go back to our $100,000, 4% mortgage, if you pay an additional $20 per month the mortgage interest payment is reduced by $6,094.76 and the mortgage is paid off over 2 years earlier! All for an extra $20 per month.
Sign Up For Automatic Deductions
This is one strategy that I’m taking advantage of. The small community bank where I have my brand new mortgage for my rental property offered a 0.25% rate reduction if I opened a checking account with them and allowed them to automatically withdraw the mortgage amount each month. My response? Yes, please! I simply went back to my employer and filled out a direct deposit slip to send the mortgage amount to this new bank account and now I’m saving a whole quarter of a percentage point on my mortgage! Check to see if your bank offers this kind of saving.
Get A Package Deal
Have you walked into a major bank lately and been pounced upon as soon as you enter the door? Lenders want to offer you as many financial products as you can qualify for, so why not take advantage? Some banks are offering better rates and terms if you have different financial products or relationships with them. Perhaps you have a credit card, IRA, brokerage account or car note with a particular bank. See what the new bank will offer you with regards to your mortgage if you move another financial product over to the new bank. You have to be willing to port your old financial product to your new bank to take advantage of these kinds of deals.
There are some additional ways to save money on your mortgage – some of which can get a little tricky or complicate, but just about everyone should be able to take advantage of the six ideas presented above. And don’t tell anyone, but these same strategies can work for other kinds of loans – like a loan for a new car.