Whether you have a current mortgage or plan to apply for a new one, there are many different avenues you can take to save money on your mortgage. With the current low interest rate environment from COVID-19 (as of August 2020) the borrowing environment is prime to put these tips into use. Here are 5 clever ways to save money on your mortgage.
1. Refinance or Recast Your Mortgage
For those with existing mortgages, refinancing your mortgage to take advantage of lower interest rates is an excellent option if you plan to continue living in your house for a while. With the current COVID-19 interest rate environment, depending on circumstances, low interest rates in the 3-4% range for a conventional 30-year fixed mortgage could be worth looking into. There are even instances, for certain borrower situations, of rates recently dipping below the 3% mark. Key considerations for this decision are both length of stay in your current property and the size of the mortgage required on the property (e.g. is cash out required for your refinance or is a straight refinance). There are many available online tools to help you calculate your specific mortgage scenarios and how much you will be able to save by refinancing, such as Realtor.com, NerdWallet, and StreamLoan.
Additionally, if lower monthly payments would help your specific circumstances, you can inquire with your lender about recasting your mortgage. A mortgage recast is when remaining payments are recalculated. Recasting, or resetting, your monthly payment may be an option if you make large lump-sum payments towards your mortgage’s principal balance. In normal circumstances, when you do so, your loan term typically shortens while your monthly payment remains the same. If your lender is willing, when the loan is recast, rather than changing the loan term, the existing term stays the same while your monthly payments are lowered.
2. Eliminate Your Private Mortgage Insurance (PMI)
PMI, or Private Mortgage Insurance, is often mandated when a down payment on a mortgage is less than 20 percent. PMI typically costs between 0.5 to 1 percent of your loan amount, which can add up over the life of your loan. One of the simplest ways to avoid this is by choosing a less expensive home, and therefore lowering the required down payment which could allow you to achieve the 20% threshold. To calculate this purchase price, which is aligned with your optimized budget, multiply the down payment you can afford by five in order to calculate the highest purchase price you can offer without having to pay PMI.
Outside of that option, after your mortgage balance reaches below 80 percent of your home’s value, you can petition your lender to cancel the private mortgage insurance. In legal terms, the law states that a lender must drop the PMI once you reach a balance of 78 percent of the home’s appraised value when it was purchased. You want to be careful though, because lenders might not be obligated to drop this insurance in case of situations such as missed payments. However, if that is the case, you can look into refinancing to eliminate your PMI.
Another option is to look into a 80/10/10 program, which some lenders may offer. This program allows you to avoid paying PMI by borrowing only 80 percent on a primary mortgage. Meanwhile, you take out another 10 percent loan as a second mortgage loan. However, this often requires a credit score of 700 or above to qualify. Keep in mind, these “piggyback” loans were more common pre Financial Crisis, and harder to find in today’s times.
3. Strengthen Your Credit
For those applying for new mortgages, strengthening your credit can assist in qualifying you for lower interest rates. These lower interest that can potentially save you significant amounts of money over the life of your mortgage. This is because higher credit ratings represent your dependability as a borrower to repay the loan. Additionally, as mentioned in the last step, higher credit scores can qualify you for programs that can help you better handle your mortgage and save money on terms like PMI, through the 80/10/10 program. In one of our recent blog posts, we talked about 9 easy ways to improve your credit score for mortgages.
When refinancing also, a strong credit score and good payment history for your mortgage often determine what rates you qualify for.
4. Make Extra Payments
Making extra payments can help you save on the cumulative interest you pay over the life of your mortgage. For example, consider a conventional 30-year fixed rate $200,000 mortgage at a 6 percent interest rate with a $1,199 monthly principal and interest payment. Each year, making an extra mortgage payment of $1,199 would save you more than $47,000 in interest over the life of the loan. Additionally, this would cut 5 years off the life of the loan. Extra payments towards your mortgage would be applied to your principal rather than your interest, meaning that you will no longer have to pay interest on the principal you just paid off every year until your final payment.
There are different ways to approach these additional payments, including opting to make extra one-time payments instead of monthly, quarterly, or yearly payments. If you come into a sum of cash at once (e.g. you receive a government stimulus or receive a bonus at work), you can put it towards your loan through a one-time payment. For example, if you make an extra payment of $2,000, with a 6 percent interest rate, you will save $120 in interest every year for the remainder of your loan’s term. Over the years, this amount saved can add up.
Additionally, you can commit to making more regular extra payments by adding more to your monthly payments. If this is within your financial ability, Bankrate’s loan payment calculator can help you calculate just how much you’ll save over time with regular, extra payments.
5. Compare Your Mortgage Options
Lastly, when looking for a new mortgage, don’t be afraid to compare your options and negotiate with various lenders before settling down on an option. Compare interest rates, loan products, and good faith estimates from each lender, and look at all your options. Make sure to use available online tools to ensure that you are making the right loan decision for your circumstances. Utilize Bankrate’s national comparison of lenders to determine which lender and loan is the right decision for you. Critical points to consider when looking for a suitable loan are interest rates, fees, and cost of PMI (if required).
Looking at all your options is important. For example, a 4.315 percent interest rate versus a 4.415 percent interest rate might not seem that different, but that 0.1% difference on a $200,000 home and a 30-year fixed mortgage with 20% down-payment equates to a $4,000 difference over the term of the loan. With that extra $4,000, you can look into a DYI home-improvement project by renovating your bathroom or kitchen. These upgrades can add immense value and personal satisfaction to your home! In our article, “How Borrowers Can Take Advantage of Record Low Interest Rates COVID-19”, we talk about how to take advantage of record low interest rates to take out home equity lines of credit (HELOC) to make value-adding home improvements. Or, you can take a relaxing vacation and enjoy an AirBnB away from home!
We at StreamLoan understand the tough financial situations many families may be facing due to the current economic environment. We strive to provide you with financial knowledge to make sure you know all the options to increase your financial wellbeing. Good luck!