By Nate Moch, Zillow.com
Your mortgage payment is most likely your largest monthly expense. But there are ways you can decrease your monthly payment and pay off your loan faster.
Let’s walk through the tips using this mortgage example:
- $200,000 mortgage
- 30-year fixed rate mortgage
- 6% interest rate
- $1,199 monthly principal and interest payment
Savings will vary based on your actual loan facts and timing of the change
1. Make an Extra Payment Each Year
If you have the means, the easiest way to save money on your mortgage is by making an extra mortgage payment each year. These extra payments are automatically applied on your principal, not interest. Not only does your remaining balance drop, but you will not have to pay interest each month on that principal for the remainder of the loan term.
Savings: $47,000. By making one extra payment of $1,199 each year and applying it to your principal, you could save over $47,000 in interest and cut 5 years off the life of the loan.
2. Create Bi-Weekly Payments
Another way to pay off your loan early is by creating a bi-weekly payment plan. Put half of your monthly mortgage payment in a savings account every other Friday (or, on your pay day). Each month, pay your mortgage from the account. At the end of the year, you will have made 26 half payments, which is 13 full payments. This will leave with you an extra payment that you can put toward your principal. Most people manage the separate accounts themselves, but there are companies that you can hire to act as an escrow service and manage the payments for you.
Savings: $47,000. Same as extra payment.
3. Cut your PMI
Many people are forced to pay private mortgage insurance (PMI) because their down payment is less than 20 percent. If you are in this boat, you can petition your lender to cancel the insurance as soon as your mortgage balance falls below 80 percent of the home’s appraised value. This can happen if your home’s value has gone up or you have repaid some of the principal. This may require a new appraisal but could shave hundreds of dollars off your monthly payment.
Savings: $130 per month. If you only put down 5 percent and had a PMI rate of .78 percent, you could save $130 per month.
4. Fight Your Property Assessment
Property taxes can be thousands of dollars a year. If you think your home’s value has decreased in the last year and it was not properly accounted for in your tax assessment, you can petition your assessor and fight your assessment. Lowering your tax assessment will lower your yearly taxes.
Savings: Varies. Depends on your local tax rate and home adjustment, but could be hundreds of dollars a year.
5. Recast Your Mortgage
Some lenders are willing to recast (reset) your monthly payment when you make large payments toward the principal of your mortgage. Usually, when you put money toward your balance, your monthly payment stays the same but the term of your loan shortens. When the loan is recast, your monthly principal and interest is recalculated so you end up with a lower monthly payment over the existing term of the loan.
Savings: $120 per month. Putting $20,000 into the loan would reset the payment to $1,079, saving you $120 per month.
6. Loan Modification
If you are late on your payments and are going through a financial hardship, you may be eligible to modify terms of your loan (such as rate, term, or principal balance) to make it more affordable. The goal of these programs is to allow borrowers to stay in their homes and continue making their monthly payments. Not everyone qualifies for these types of programs, but if you do, they can save you a lot of money. To find out if you qualify, contact the servicer of your mortgage or visit the Making Home Affordable eligibility site.
Savings: Varies. It can reduce your interest rate to as low as 2 percent, extend your term to 40 years, or reduce your principal.
7. Refinance Your Mortgage
The most common way to save money is by refinancing your mortgage to a lower interest rate. Reducing your rate can lower your monthly payment and help you save on interest payments. However, there are costs associated with refinancing so you want to be sure you are going to save enough to cover the refinancing fees. Zillow Mortgage Marketplace allows borrowers to shop for the lowest mortgage rates, without sharing any personal contact information with lenders. Borrowers can compare rates, loan programs, and lender ratings and reviews, and then calculate if refinancing makes sense before contacting a lender. With rates at historic lows, if you can refinance, and you haven’t already, you should.
Savings: $126 per month. By lowering your interest rate to 5 percent, you would have a payment of $1,073 which would save you $126 per month. If the refinance costs $5,000, you would recoup the fees after 40 months.