I will never forget the day my eyes popped out of my head. I was purchasing my first home and was applying for a mortgage. While I knew the amount for the home purchase, I was not prepared for the real amount I was paying for the home. Anyone with a mortgage knows what I am referring to; the real price you are going to pay – principal and interest – will likely be 120-150% of the purchase price. While someone could make an easy argument that this is good interest, an argument I would tend to agree with, we won’t debate that here. This article will focus on helping those with debt aversion keep their eyes in their sockets.
1. Refinance Your Home
Mortgage interest rates are not static; they ebb and flow with the economy. In general, rates can be affected by everything from federal reserve policy, inflation, unemployment rates, market volatility, and the housing market in general. With interest rates hovering at historic lows, this a very popular option.
Of course, refinancing for the purpose of reducing mortgage interest only makes sense if you will be getting a new, lower rate that justifies the somewhat lengthy process and any closing costs associated with the transaction. Depending on the amount of your loan, even a 1% -2% interest rate reduction could potentially save you hundreds of dollars each month. Accrued overtime, amounts to significant savings.
2. Mortgage Recasting
Mortgage recasting is another great option for lowering your mortgage interest, but you’ll need a significant amount of cash on hand. This process begins when a borrower pays a large sum of money toward their mortgage’s principal. The lender then recalculates the loan based on the new balance and repayment schedule.
Unlike with a refinance, the terms or interest rate on your loan will not change, but the recast reduces your monthly payments for the remainder of the loan. It’s pretty simple, really. Because you are borrowing a lower amount, you won’t pay as much in interest.
Keep in mind, there is usually a minimum amount that must be paid for the lender to perform a recast and not everyone is eligible. Anyone with a government-backed loan (including VA loans, USDA, or FHA loans) or jumbo loan is usually excluded.
3. Increase Your Monthly Payments
Even if you don’t have a lump sum of cash to perform a recast, you can still reduce what you pay in mortgage interest by (1) making extra payments throughout the year and/or (2) paying more than you owe each month. Not only does paying extra reduce the principal amount and subsequent interest charged, but can help you build equity in your home at a faster rate.
You may even consider making biweekly mortgage payments to help reduce the principal. This strategy involves making half your mortgage payment every two weeks. The “26 half payments” add up to 13 full payments a year. On the contrary, making monthly payments adds up to 12 payments a year. On a 30-year mortgage, making one extra payment could potentially knock years off the life of your loan and the amount you would have paid in interest in the process.
If you decide to take advantage of this strategy, make sure your lender is aware you’d like the extra funds to be allocated toward the principal and not toward the next month’s payment. Check with your specific lender for their rules on making extra or surplus payments.
Invest in Interest Savings
Saving on mortgage interest results in having more cash over time to deploy towards other financial milestones that are important to you. The funds you would normally pay in interest to your lender can be used to pay down other debts, accelerate your retirement savings, or invested to save and build wealth for the future.
If you have questions about these or other financially savvy money-saving strategies or are in need of a trusted financial ally to help you make other important financial decisions, feel free to contact the advisors at William Asset Management to schedule a call today.