Even with record-low interest rates, the amount of money the average home owner pays for interest during the course of their mortgage can boggle just about anyone’s mind. Even though most of us would rather live without this knowledge, not knowing can end up costing even more. In fact, there are several “secrets” to paying down a mortgage that can be costly to a homeowner who hasn’t discovered them. Here’s a few tips of the trade to save money on your house:
Shorten the Term
Did you know that even home owners with low interest rates often pay interest totaling two-thirds of their home’s value over the course of 30 years? It’s true. That’s why many consumers are now opting for a 15-year loan, which cuts the interest by more than half. And those who can afford it are even choosing 10-year terms, allowing them to reduce their total interest to just 20 percent of the cost of their home!
Any amount paid over the required payment each month can be applied directly toward the principle mortgage balance. Even lowering that principle by an extra $50, $100 or $200 a month will reduce the amount being charged interest, and it can certainly add up over the period of a mortgage. Paying a mortgage off early can save tens of thousands – or more – dollars!
Did you know that the first 12 years of a 30-year mortgage payment schedule apply almost entirely to interest? Most home owners don’t start really paying down their principles until year 22. So each time you sell or refinance? Yep, you start that schedule over and extend your interest payments longer.
Another cost to owning a home, in addition to your principle and interest, is PMI, or mortgage insurance. Home owners with less than 20-percent equity are generally automatically charged PMI, and it can be expensive. PMI rates vary from .5 to 6 percent of the principle loan. To save the most money, save for a 20-percent down payment before you buy. Or, if you make improvements to your home that increase its value enough that your payments total 20 percent of its value, it might be worth paying for a new appraisal; just call your lender first!
Some lenders allow borrowers to set up their loans on a bi-weekly schedule rather than the traditional monthly one. By paying bi-weekly at half the monthly payment amount, the borrower will actually make 26 payments year, which is equal to 13 monthly payments instead of 12. Just that one extra payment a year can drastically reduce the interest charged over the course of the mortgage term. For example, a customer who pays $800 every two weeks on a 30-year, $300,00 loan at 5 percent will save about $50,000 compared to a customer who pays $1,600 a month toward the same loan, allowing him to pay the loan off about four years earlier!
Look for Discounts
Discounts – no matter how small – on interest rates will add up to plenty of savings over the term of a mortgage. Some banks and other financial institutions will offer a small discount to their customers. So before you buy, check with the bank that holds your checking, savings or money market account and see if it will cut your interest rate in thanks for your loyalty. Likewise, some lenders will offer discounted rates to borrowers employed in certain occupations. So if you happen to be a fire fighter, police officer or teacher, look for lenders that apply an occupation-based mortgage discount.
Take Advantage of Tax Credits
Many states now offer residents a Mortgage Credit Certificate, which can lower your federal tax liability by applying a direct tax credit for a portion of mortgage interest for the life of the mortgage. It actually provides a dollar-for-dollar reduction of income tax liability for the life of the loan. Check for the option in your state and find out what steps you need to take to receive it.