For most homeowners, mortgage costs are the largest regular expense in the family budget. How can you manage those costs in the most efficient way? We offer a few suggestions for reducing either short- or long-term mortgage expenses to fit your needs.
1. Refinancing – According to Casey Fleming, Mortgage Advisor at C2 Financial and author of The Loan Guide, "When you are refinancing a mortgage, the most important thing is to identify what your goals are."
Do you want to accept a longer loan term and higher total costs over the time of the loan to minimize your monthly payment? Are you interested in the opposite path of shortening your loan term to pay off your loan more quickly and save on total costs?
For those looking to lower their payment, Greg McBride, Chief Financial Analyst at Bankrate.com, suggests, "Consider refinancing if you think you can shave a half to three-quarters of a percentage point off of your interest rate." Jordan Goodman, Personal Finance Expert and Author at MoneyAnswers.com, agrees with the half-point threshold, noting, "It's going to take a while to recover those closing costs."
2. Rate Shopping – You can save on your initial mortgage or a refinancing by shopping around for a better rate. However, check your credit report first to make sure that an unexpected blemish on your report does not undermine your efforts. Credit reporting errors can — and do — occur. If you believe there is a mistake on your credit report, you can resolve it with a single click using our credit correction service.
3. Asking Your Current Lender for a Better Rate – Banks and credit unions are keenly aware of their competition. If you have a suitable credit score and an excellent repayment record, try asking your bank to meet a potential competing rate. They may reject your request, but there's no harm in asking.
4. Adding Payments toward Principal – By adding an extra payment toward your principal each year, you can save significant amounts of money on interest while increasing your home equity. However, you must verify with your lender that extra payments are being applied only to principal.
Should you come into a large one-time windfall, some lenders will allow you to "reset" your mortgage by making a large payment toward principal and keeping the monthly payment the same, thus significantly reducing your loan term.
5. Avoiding Private Mortgage Insurance (PMI) – By making a down payment of at least 20%, you can avoid PMI altogether — but if that ship has already sailed, you can ask your lender to cancel the PMI once you reach a suitable level of equity in your home. You may not have to wait until the 20% equity mark if you have an excellent repayment record. It can’t hurt to ask!
6. Considering Loan Modification – A loan modification is not a refinancing, but a changing of the loan terms to assist those who are having trouble making their payments. There are several federal loan modification plans available, so discuss your goals with your lender to assess your qualifications. A lender would rather work with you than have you miss payments and eventually default on your loan.
7. Verifying Your Assessment – You could be paying too much in property tax if your home value is improperly assessed. The National Taxpayers Union has estimated that up to 60% of U.S. homes are assessed beyond their true value. However, think about how long you plan to stay in the home — a reassessment may have an impact on your ability to sell.
With suitable planning and collaborative effort with lenders, you can meet your mortgage reduction goals, whether they are based on lowering monthly payments, lowering overall costs, or any other financial objective.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.