How to Save On Your Mortgage – 9 Smart Tips
Mortgage repayments make a significant portion of your monthly expenses. It can eat up to 1/3rd of your monthly income. It would have been really nice if we can spend a little less on repayments. With the mortgage rate reaching 2 months high, the question of saving on mortgage has become all the more important. Well, here are a few quick tips that can help you to save big money on housing expenses.
1. Shop Around
The best way to save on mortgage is shopping around. Log on to a loan comparison portal, enter your financial details and you get a number of plans to choose from. The obvious benefit that an online comparison portal gives you over the conventional brokers is that you get tailor made mortgage plans matching your specific needs and you bag the best interest rates. Moreover, it becomes easier online to ascertain the credibility of the respective lenders. So, getting and comparing mortgage quotes online is a sure shot to save BIG money!
2. Keep Your Credit Score High
A healthy credit score not only makes it easier to get the mortgage plan of your choice but also puts you in a better position to negotiate the rate.
3. Go for a Higher Down Payment
The higher the down payment, the lower the monthly repayments will be. Ideally, a 20% down payment is sufficient enough to bring down the cost of a mortgage.
4. Consider Pre-paying Mortgage
By paying earlier, you can enjoy substantial savings on interests accrued on repayments. But while planning to pay off your mortgage earlier than the agreed term, you should keep in mind the pre-payment charges. It is charged by the lenders because when you choose to pay earlier than intended, they lose substantial interests on the loan. Paying off your mortgage early makes sense only when the interest so saved is higher than the pre-payment charges.
5. Consider Refinancing Mortgage
Refinancing your mortgage, when the rates tumble down, is a smart way to save on interest payments. However, getting a mortgage refinanced involves some fee. Ideally, refinancing is worth only when the rate falls by 1 – 2%. Before refinancing to a lower interest rate, talk to a mortgage expert and make sure that the eventual savings are bigger than the refinancing fee.
6. Switch from Fixed Rate to Adjustable Rate
It’s true that fluctuating rates can take away your peace of mind. But it’s also true that in the long run Adjustable Rate Mortgage stands cheaper than Fixed Rate Mortgage.
7. Increase the Monthly Repayment
Adding meat to your monthly instalment can save you substantial interests on the repayments. Here’s an illustration:-
Hanks took $1, 00,000 mortgages at a rate of 5.0% for a 20 years loan term. His monthly repayment is $660 and the total interest amount payable through the loan term is $58,389.
If Hanks opts for increasing his monthly repayment even by a small margin, say $40, the total interest amount payable through the loan term comes down to $52,265 , thus saving him $6,124 and he would also be paying off the mortgage 2 years earlier.
8. Increase the Repayment Frequency
Another great way to save on mortgage is increasing the frequency of the repayment. Let’s do the math:-
Hanks took $1, 00,000 mortgages at a rate of 5.0% for a 20 years loan term. His monthly repayment is $660 and the total interest amount payable through the loan term is $58,389.
If Hanks choose to switch from monthly repayment to fortnightly repayment, his repayment will become $304 per fortnight, making it a total of $608 per month. Thus, Hanks can save $52 every month by paying fortnightly rather than paying monthly.
9. Reduce the Loan Term
Reducing the loan term is yet another way to save on interest payments. Here’s an example:-
Hanks took $1, 00,000 mortgages at a rate of 5.0% for a 20 years loan term. His monthly repayment is $660 and the total interest amount payable through the loan term is $58,389.
If Hanks choose to reduce his repayment term from 20 years to 15 years, the repayment will become $791 per month and the total interest amount payable through the loan term will become $42,343, thus saving him a whopping amount of $16,046.
However, experts believe that a longer loan term (above 20 years) is more preferable to a shorter one as it gives the homeowner more flexibility if things don’t go as planned.
Keep in Mind
If paying off your mortgage sooner means you have to part away with your hard-earned savings, it might not be a good idea after all. The thumb rule is to start considering paying your mortgage early only after you have sufficient savings to cover your present needs and future contingencies. It is as useless to repay the mortgage earlier than intended by taking a new debt. The rule of thumb is to make a repayment priority. The debts that are most expensive should be repaid first. Going by this rule, you will be able to manage your debts and mortgage repayments better, saving BIG cash in the long run.