Housing is right up there with groceries as a major household budget item for many families — not just in the raw amount of money shelled out, but also in importance. Food and shelter and all that.
Since housing involves a commitment (either a lease or a mortgage) there's less flexibility in adjusting housing costs than there is in adjusting a grocery budget. After you sign the lease or mortgage paperwork, that's it for the term of the lease or mortgage. Modifying the terms of the mortgage or lease can be expensive if they can happen at all.
DINKs Finance summarizes some tips for saving money on your mortgage. I'll comment on the tips they offer.
- Set up biweekly payments. This is a fairly painless way to sneak in an extra payment per year. The idea is that you pay half of your mortgage payment every two weeks. Since most months are a little bit more than four weeks each, you'll get a two (or possibly three) months per year that you make an extra half-payment. Warning: just don't pay to have this arranged. You shouldn't have to pay for it.
- Double-up your payments. This is debt reduction on steroids. (I'd love to be able to do this now but we're looking to build up an emergency fund first before tackling debt.) If your payment is normally $700, you pay $1,400 each month. The extra $700 goes right to the principal, and reduces the interest accrued during the month.
- Yearly prepayments. Some mortgage servicers charge prepayment penalties. (They may feel the need to get some interest out of you!) But barring that, knocking down a full year's payments at once will save some interest. This could be a great place to apply a year-end bonus or some other financial windfall.
- Refinance your mortgage. This modifies the mortgage rate. Rates have been on the way down the past few years, so it may be a good idea to look into refinancing if you have had the same rate for a while. You may be pleasantly surprised at the difference in payment. However, refinancing usually isn't free, and you'll likely be resetting the mortgage term, which will mean more interest. If you get a reduction in rate and keep the same payment that you had before, though, you'll likely save money in the long run.
- Buy your home sooner rather than later? This one is a bit dubious, sorry. In a way, I can see where they were going, but buying just because you're on the fence and because buying now means that you'll be debt-free earlier isn't a good reason by itself for saving money on a mortgage. There are lots of people who were “afraid of missing out” that they rushed in, and later wished they hadn't, because they're stuck with an upside-down mortgage. I also don't buy that your home is a huge asset. It is if it generates income for you, but otherwise, it's a big building that requires maintenance, upkeep, and utilities. It's expensive. Consider the context of the rest of your finances before jumping in! You could save a ton of money on your mortgage by just not getting into a bad one!
The key to refinancing is to make sure you don’t refinance into a new loan that extends your payments past the date of the original mortgage. So if you’re 5 years into a 30 year mortgage, don’t refinance into another 30 year mortgage, otherwise you’ll just end paying interest for 35. Go with a 20 or 15 year instead.
Interesting. I ran the numbers for my mortgage, and even if I refinanced to another 30-year, I’d still pay less interest overall than if I kept my current mortgage. That’s with an extra 3 years of interest.
Good points! I refinanced years ago from a 30 year to a 15 year mortgage. I called my bank 3-4 years ago to find out how much I needed to add to my payment to have it paid off when I retire in less than 5 years. There is a lot you can do by j ust asking questions.
Lenders will offer more help than they used to, I think. For my original mortgage, it cost to get another amortization schedule!
On the refinancing side of things, you can almost refinance to a 15 year and keep the same monthly payment depending on your current rate. If you haven’t refinanced in a while, I would see what your options are. My folks bought a second home several years ago with a 30-year and just refinanced to a 20-year mortgage with a LOWER monthly payment. Incredible.
I can’t quite get a lower payment with a 15-year, but it’s not a whole lot more. I’m sorely tempted but don’t want to commit myself to too high a payment right now. 20-year might work, though!
How awesome — paying a year’s worth of mortgage! What a great idea.
Yes. Would definitely be nice.
I’m a big fan of the fifteen year mortgage rather than the 30 year. That means buying a cheaper house than is affordable, but it helps you pay it off earlier and saves tens of thousands in interest.
We refinanced one property to a 15-year. It’s getting close now!
I think I’m addicted to refinancing haha. I’ve owned my condo for 2.5 years and done two no cost refi’s. The rates just keep going down. I almost feel like I’d rather not pay extra to the mortgage when I’m able to borrow at 3.125%. I’d rather max out all my retirement accounts and save up for my next real estate purchase.
Right now, we pay 1/12 of a payment extra each month so as to have an extra payment per year. We hope to start adding much more as we pay off more debt and have more money available. I want to own the house outright. Very freeing to think about.