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Four Ways to Save $50,000 or More On Your Mortgage

Note from David: When I got serious about financial improvement, I knew I wasn’t going to be able to totally eliminate dining out, Starbucks, and other indulgences like every personal finance book told me to. (Some people can; I just liked them too much.) Instead, I chose to a) earn more money and b) drastically reduce my biggest monthly expense—my housing. I ditched my apartment, moved in with roommates, and cut my rent IN HALF.

The lesson?

You can easily save more money on the big stuff (your home and your car) than on all the little stuff combined…you just have to be willing to make the leap. You can make a big dent in your budget by downsizing your crib OR—if you’re a homeowner—you can save TENS OF THOUSANDS of extra dollars over the long-run by taking a long, hard look at your mortgage.

Here’s Sarah:

How to Save Big Money on Mortgage Interest

Despite the recent downtrodden real estate market, buying a home is typically a good long-term investment…especially if you get in during a market dip. Just how much you can gain from owning your home depends on a number factors, but two big ones are:

For example, if you hold a $300k mortgage at five percent over 30 years, you’ll end up paying $279k in interest. (And let’s not forget, 20 years ago homeowners paid mortgage rates of 15 percent or more!)

So…if I can show you some ways to shrink that figure, wouldn’t you be interested?

GET A SHORTER LOAN

If you can afford the monthly payments, getting a home loan with a shorter term rather than the traditional 30 years can is the financially savvy way to go. In fact, there’s mounting evidence that 20-year fixed rate mortgages may gradually become more popular than 30-year mortgages.

Not only do they save homeowners a ton of interest, but 20-year mortgages are safer for investors (and yes, we should care, because bad mortgages led us into this lousy economy in the first place).

That $300k loan at five percent would cost $1,610 a month. The same loan amount with a 20-year term would have a monthly payment of $1,980. Amortized over 15 years, it would cost $2,372. Some lenders even offer 10-year terms on home loans. Here’s a table showing the same $300k loan with different interest rates:

If you're able to make a higher monthly payment, a shorter mortgage term can save you tens of thousands on your home loan.

If you can afford to make larger payments each month, you’ll end up saving yourself anywhere from 10 to 15 years of interest, meaning thousands of dollars that would have been wasted are going back in your pocket.

Another important point is that the shorter the term of the loan, the lower the interest rate typically is, since the lenders plan on getting their money back faster and there is slightly less risk involved in the loan.

It’s David Again: When my wife and I bought a home last year, I convinced her to go with a 20-year loan. The monthly payment difference was about $250 for an interest savings of over $60,000. Do we miss that $250 every month? Sure. But is it worth it to save 60 grand? Hell yes!

PAY YOUR LOAN FASTER

Another way to pay less interest on your mortgage is to simply make payments more frequently. If you’ve got a 30-year mortgage you want to stick with, this is your strategy.

Many lenders allow you to pay your mortgage bi-weekly instead of monthly. Making bi-weekly mortgage payments can help you to pay off your mortgage between six and eight years earlier than you would with monthly payments. And that means you’ll save a huge chunk of cash on interest.

On that $300,000 loan at five percent, you’d be looking at a bi-weekly payment of $805 instead of $1,610 monthly. And over the life of the loan, you’d save $51,493 by paying your mortgage every other week instead of monthly.

Keep in mind that if you get paid every other week, making bi-weekly payments is almost a no-brainer, since you can have your mortgage payment transferred automatically on payday…

A final caution. Unfortunately, making bi-weekly mortgage payments isn’t always free. Some lenders charge a set-up fee, around $300 to $400, just for the privilege of making more frequent payments. Although unusual, you’ll also want to ensure your mortgage does not include a pre-payment penalty.

MAKE LUMP SUM PAYMENTS

If you can’t afford to make bi-weekly payments on a regular basis, you can still reduce the total amount of interest you’ll pay on your mortgage by making occasional extra payments.

(Think tax refunds, small inheritances, or Christmas bonuses.)

The occasional lump sum payment may not help you pay off the mortgage ten years early, but it will save you money on interest over time, and every little bit helps.

REFINANCE

If you have equity in your house and you’re paying more than the current interest rates, consider refinancing to lower your interest rate. (Check the latest mortgage rates in your area). As an example, if you refinance from five percent to 4.25 percent on that 30-year, $300k mortgage, your monthly payment will drop $134, from $1,610 to $1,476. How much interest you will save (if any at all) depends on several factors, including:

  • How long you held your old mortgage.
  • How much equity you have in your home.
  • The term of the refinance mortgage.
  • The closing costs on the refinance.

The best way to use refinancing to save on interest is to refinance into a new mortgage that:

  • Has a lower interest rate AND
  • A shorter term.

For example, if you’ve held a 30-year mortgage for five years at six percent, you could probably get a significant interest savings by refinancing to a 20-year mortgage at 4.75 percent (perhaps for a similar monthly payment).

Determining whether or not refinancing is a good decision can be tricky. There’s no substitute for carefully going over actual numbers you get from a loan officer, but you can play with refinancing scenarios using BankRate’s refinance calculator to get a sense of whether refinancing makes sense for you. In a refinance, you want to consider three things:

  • The upfront costs (i.e., how much cash do you need now?)
  • The monthly payment.
  • The long-term interest savings.

David again, one last time: More than ever, having really awesome credit is critical to successfully refinancing. (And getting a new mortgage, if you haven’t bought yet.) Check your credit score and, if it’s not in the mid-700s take four to six months to repair your own credit before applying for a home loan. We’re talking about saving money on interest here, and the single best way to do that is to have the best credit possible when you apply.

When it comes to your home, small changes can result in HUGE savings over the long run. And there’s never a better time to act than right NOW. Good luck!

What about you? Have you taken steps to reduce the amount of interest you’ll pay on your mortgage? What did you do? And how much do you think you’ll save?

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. Excellent article!

    To add in another real life example: Last year, when my wife and I were shopping for a new home, we looked at the market a bit and set our price range at around $300K and began talking to the banks about financing, specifically the monthly payments, interest rates, and different lengths for the loan.

    I was amazed when (due to the interest rate decrease for the shorter term loan) the 15 year mortgage was less than $300 per month more than the 30 year. Taking the 15 year was pretty much a no brainer.

    P.S. we ended up finding a great house significantly under our budget which we like more than the more expensive ones, and saved even more.

    • We just refi’d to a 15 year at a 3.6 interest rate. We’ve owned the house for about 2 years, and were originally on a 30 year at 6.5, so this is a huge improvement, and it is easily worth the increased monthly payment.

  2. I have been going with the ‘biweekly’ strategy although I pay it only once as an “extra principal” checkbox on the monthly payment. When I got my mortgage in 2009, I knew I could afford the 15 year loan, but it would be tight. So I went for the 30 year with the firm dedication that every month I had enough extra money, it would go towards a double payment. I like this strategy because I feel very secure knowing I will ALWAYS have enough for the monthly required payment, but I can also pay up front as much and as often as I like. My financial goal this year is to get on track to pay off the whole mortgage in 10 years.

  3. For those who like details, mine is a a 30 yr fixed @ 4.875%

  4. These tips are great, especially about paying early. Over the course of 30 year mortgage the amount of interest paid is truly staggering. I also loved David’s point about trying to save big on the big things. Too many people obsess over a dollar here and there while they ignore 5 figure savings opportunities.

  5. I know this probably not going to be popular, but I think paying off your mortgage is actually not a strong financial move. A locked in 30 year fixed low interest rate is an amazing tool in protecting you from inflation. Think about it, the quicker you pay off the loan the more money you are “risking”. Meaning that inflation (which is happening now) will eat up all the money you used to pay off the loan. If you don’t pay down the bank takes the loss. If you keep making the payments each month and don’t pay extra, you have more cash to invest in other assets or you can at least retain additional cash flow in case of an emergency. The other point here is that the mortgage interest is tax deductible. When you consider the tax break combined with inflation, you are paying back the debt with “cheaper” dollars. This is especially effective when you invest in prudent rental properties – just my opinion.

    • That is perfectly reasonable position. However, I would note that inflation is (usually) lower than your interest rate. You are paying with “cheaper” dollars, but you are paying many many more of those dollars.

      I prefer the shorter term loan for the simple fact that I’d like to be free of the payment sooner, but at the low interest rate I have right now, paying it down sooner is at the bottom of my list of financial goals.

  6. I agree with Brian on Arthur’s comment. The inflation rate has lately been around 1.5%. My mortgage is significantly higher than that. Also there are rumblings of eliminating the mortgage interest tax deduction in Congress, which will change the equation for many homebuyers in urban areas quite a bit.
    I don’t invest a lot and don’t have much faith in the stock market, but I do have faith that my house will be there in 30 years, and I’d rather live in it worry free as long as possible.

    • I think the problem is that when people are looking at inflation numbers they believe the numbers the government spits out. Think about it, how is the rate of inflation measured? The government doesn’t include commodities (food & energy) when it runs the numbers – this makes no sense. If you just look around everything is more expensive – coffee, sugar, oil, education, and it is going to continue to raise over time, especially when you consider the high rate at which the US government is printing FREE MONEY (quantitative easing). Just think about this, over the past year and a half the fed has printed more money than in the previous 200 hundred years combined.

  7. Another item to consider is the huge amount of debt the country is in and the fiscal responsibility the gov. has to pay back pensions, social programs, etc. The only way to make good on those bills will be to raise taxes or print more money. Taxing us more will help, but that won’t even get close to covering the debt burden. There is only one solution, print more money and pay with cheaper dollars. Most people don’t realize is things like GOLD haven’t increased in value, it is just more evidence that dollar is losing its buying power. Sorry for being so long-winded.

    • Arthur is right, and another reason to not put too much into your mortgage is liquidity. Once you put money into the mortgage you can’t get it out unless you sell the house or get a home equity loan.

      I think it’s a good idea to put some extra money toward the mortgage, but your money can be put to better uses. Even if you aren’t a master investor you can just put the money in a bond index fund and make 6-8% with very little risk. If interest rates were higher this wouldn’t work very well, but for now this works great.

  8. David Weliver says:

    Thanks for the perspective, Arthur. I agree that it’s important to consider inflation and that your strategy may be able to earn more money in the long run. I also think there’s something to be said for the benefits to MOST people in simplicity and automation…paying down the mortgage faster is an easier and more automated (i.e., foolproof) way to save money than additional investments.

    I know Sarah mentioned using your home as an investment, which is fine, although personally I try not to think of my home as an investment rather just a home…which also explains why I want to get out of the mortgage in 20 years instead of 30. THAT said, I might take a totally different approach if I invested in a rental property, for example.

  9. Expanding on a couple of earlier posts, If you are more comfortable with a 30-year mortgage, but want the advantage of a shorter-maturity, then just add principal payments. This is what we are thinking about- we are sitting on cash but it makes no sense to make a bigger down payment. We could invest the extra cash while making up payments with the savings, thus saving on interest and locking in the cash if we need it. This is assuming mortgage rates stay low.

  10. I refi’d back in November to a 30-year, 4.25% down from a 5.5%. Our P+I went from $1,616/month to $1,377, almost a $250 savings a month. We’re pretty much set as mortgage rates have sky-rocketed in the last couple of months.

  11. One of the best posts I’ve read on this topic. I was lucky to get a low rate on a 15-year loan. I am also trying to pay it off early, in fact by the age of 30, as my blog details. My bank, Wells Fargo, lets me do the bi-weekly payments for free, and mine are super-sized, to pay it off early. Plus, those lump sum payments. At this point, I think the mortgage companies are realizing they need to take the money any way they can get it! For me, a 15 year mortgage was right because my home is low in value. I could have bought a property 2 or 3 times the cost of mine. So even if I lose my job, I won’t panic abut the payments. For others, it may make more sense to get a 30 year loan for the low payments, then just send in extra cash as they go along. Right now, I’m on pace to pay it all off in about 4-5 years after the purchase.

  12. Also, if you’re paying early, make sure your payments are getting applied to the principle not the interest. Don’t trust the bank to apply it to principle as they will more than likely apply it to what benefits them the most (interest).

    • Good point John. My statement either online or paper has a checkbox that asks me to apply to extra principal or extra interest. The extra principal box is the first option.

  13. We purchased home $450k in end of 2009 @4.5% interest rate. It is 30 year fixed loan.
    Is it worth refinancing now to 15 years with much lower interest rate? Please advice.
    We are planning to stay in this home for another 5-7 years.

    Thanks.