Ways To Save On A Mortgage
by Dan Caplinger | Updated July 19, 2021 – First published on Dec. 6, 2018
Most people in the market to buy a home rely on mortgage loans to provide the financing they need to make their purchase. With real estate prices on the upswing in many real estate markets and mortgage rates starting to move higher as well, it’s more important than ever for those shopping for a home to find ways to save on their mortgages.
Most people in the market to buy a home rely on mortgage loans to provide the financing they need to make their purchase. With real estate prices on the upswing in many real estate markets and mortgage rates starting to move higher as well, it’s more important than ever for those shopping for a home to find ways to save on their mortgages.
There are several smart ways you can control your mortgage costs. Whether it’s looking for the lowest monthly payment possible or trying to minimize the amount of interest you’ll pay over the life of your loan, the following ideas can help you reach your financial goals of home ownership.
Pay More Than The Minimum
Imagine you purchase a $360,000 property with $60,000 as a down payment, and the interest rate on your 30-year home loan is 3%. A quick look at a mortgage calculator shows the principal and interest payment on your loan works out to $1,264.81 each month.
You could just make that $1,264.81 monthly minimum payment and cover the interest charges and part of your principal balance. However, paying more than the minimum on your mortgage would result in every extra dollar going directly toward your principal.
If you started this mortgage paying an extra $100 per month from day one, you would save $19,437 in interest payments and knock more than three years off your repayment timeline. Or, if you paid an extra $200 a month, you would save $34,428 in interest payments and pay off your home loan in 24 years instead of 30.
And the news gets better and better if youre able to increase your monthly payment more over time, because again, every dollar over the monthly minimum goes entirely toward paying down your mortgage.
Consider Rolling The Dice On An Adjustable Rate Mortgage
Home loans fall into two categories: fixed rate mortgages that keep the same interest rate for the life of the loan, and adjustable rate mortgages whose interest rates change from time to time. Typically, ARMs have lower interest rates than fixed rate mortgages, especially during the first part of the mortgage term. That can produce lower monthly payments.
The tradeoff, though, is that rates on ARMs can adjust higher when interest rates in the broader market are on the rise. That means that what was initially a savings compared to a fixed rate mortgage could end up costing you more in the long run. However, with various choices that let you lock in an initial rate for an extended period of five years or more, there are ways to balance the risk of higher rates against the immediate savings that an ARM can give you.
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Ways To Save Thousands In Mortgage Interest
Its common knowledge that youre going to pay interest when borrowing money. When it comes to home buying, you may not realize just how much interest you will be paying.
Say youre approved for a $300,000 30-year mortgage with a 4% interest rate . If you make your monthly payment as required, then you’ll wind up paying a total of $215,609 in interest over time. Thats almost as much as your loan principal!
It may sound scary at first, but we have a secret. Did you know there are ways to save money on mortgage interest? It’s true. Read on to learn five of the most popular ways to accomplish greater long-term and overall savings.
How To Save With A Variable Mortgage
When it comes to mortgages, the age-old question remains: Should I go with a variable or fixed-rate?. To make an informed decision, it is important to look at the type of buyer and the historical trends.
When it comes to variable versus fixed-rate, it is important to understand what these mortgages are based off of. Fixed mortgages are so named as they are based on a fixed interest rate that is set for the duration of the term with fixed payments. On the other hand, variable-rate mortgages fluctuate with the Prime Rate. This can either mean fluctuations in your payment, or if you choose to have set payments, the interest portion of the payment.
In the last 10 years, the prime lending rate has gone from 2.50% to 3.95% and now sits at 2.45% as of January 2022. Due to recent events, these rates have seen even more of a downturn providing huge benefits to new borrowers looking to pay as little as possible.
While a variable-rate mortgage is linked to the Prime Rate, which could cause fluctuations, historically the choice of a variable rate mortgage over a fixed term has allowed borrowers to save in interest costs.
However, due to the uncertainty and potential fluctuations that can occur with a variable-rate mortgage, it comes down to the borrowers comfort. Some individuals have no wiggle room in their budget for potential changes in mortgage payments, or they do not like the uncertainty. For these clients, a fixed-rate would be the best choice.
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Why Does Your Monthly Calculator Have Four Columns
We think its important for you to compare your options side by side. We start the calculator by outlining the four most common options for down payment scenarios, but you are not limited to those options. We also allow you to vary amortization period as well as interest rates, so youll know how a variable vs. fixed mortgage rate changes your payment.
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Funding Your Retirement First
Unfortunately, while its better to pay a mortgage off, or down, earlier, its also better to start saving for retirement earlier. Thanks to the joys of compound interest, a dollar you invest today has more value than a dollar you invest five or 10 years from now. That’s because it will be earning interestand the interest will be earning interestfor a longer period of time. So each year you delay saving for retirement will hurt you a disproportionate amount.
For that reason, it generally makes more sense to save for retirement at a younger age than it does to pay down a mortgage sooner.
Of course, investments dont just rise they fall, too, and their performance can fluctuate wildly with the financial markets. The returns, alas, arent usually as fixed as mortgage payments are. But thats all the more reason to start investing sooner rather than later. Your portfolio has more time to recover from roller-coaster behavior by the market. And the stock market has historically risen over the long term.
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Get An Offset Account
If you get an linked to your home loan, it functions as a regular everyday account, allowing you to withdraw money from ATMs and buy things using a debit card. But the money in the account is also offset against your mortgage, so you pay interest only on the balance of your loan minus all or part of what is in your offset.
What happens if I maintain $50,000 in my offset account?
If you have a $600,000 home loan with a 3.6% interest rate and a 100% offset account with a $50,000 balance, interest will be charged on only $550,000 of your home loan.Note: Some loan products offer only a partial offset feature.
Choosing The Mortgage Term Right For You
A mortgage term is the length of time you have to pay off your mortgagestated another way, its the time span over which a mortgage is amortized. The most common mortgage terms are 15 and 30 years, though other terms also exist and may even range up to 40 years. The length of your mortgage terms dictates how much youll pay each monththe longer your term, the lower your monthly payment.
That said, interest rates are usually lower for 15-year mortgages than for 30-year terms, and youll pay more in interest over the life of a 30-year loan. To determine which mortgage term is right for you, consider how much you can afford to pay each month and how quickly you prefer to have your mortgage paid off.
If you can afford to pay more each month but still dont know which term to choose, its also worth considering whether youd be able to break evenor, perhaps, saveon the interest by choosing a lower monthly payment and investing the difference.
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Make Extra Mortgage Payments
Another way you may be able to save money on interest, while reducing the term of your loan is to make extra mortgage payments. If your lender doesnt charge a penalty for paying off your mortgage early, consider the following early mortgage payoff strategies.
Just remember to inform your lender that your extra payments should be applied to principal, not interest. Otherwise, your lender might apply the payments toward future scheduled monthly payments, which wont save you any money.
Also, try to prepay in the beginning of the loan when interest is the highest. You may not realize it, but the majority of your monthly payment for the first few years goes toward interest, not principal. And interest is compounded, which means that each months interest is determined by the total amount owed .
Hybrid Or Combination Mortgages
You could choose to opt for a hybrid or combination mortgage. In these mortgages, part of your interest rate is fixed and the other is variable.
The fixed portion gives you partial protection in case interest rates go up. The variable portion provides partial benefits if rates fall.
Each portion may have different terms. This means hybrid mortgages may be harder to transfer to another lender.
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How Mortgage Rates Have Changed Over Time
Todays mortgage interest rates are well below the highest annual average rate recorded by Freddie Mac 16.63% in 1981. A year before the COVID-19 pandemic upended economies across the world, the average interest rate for a 30-year fixed-rate mortgage for 2019 was 3.94%. The average rate for 2021 was 2.96%, the lowest annual average in 30 years.
The historic drop in interest rates means homeowners who have mortgages from 2019 and older could potentially realize significant interest savings by refinancing with one of todays lower interest rates. When considering a mortgage or Purchase, its important to take into account closing costs such as appraisal, application, origination and attorneys fees. These factors, in addition to the interest rate and loan amount, all contribute to the cost of a mortgage.
Are you looking to buy a home? Credible can help you compare current rates from multiple mortgage lenders at once in just a few minutes. Use Credibles online tools to compare rates and get prequalified today.
Thousands of Trustpilot reviewers rate Credible “excellent.”
Mortgage Term Vs Amortization Period
Its common for homebuyers to confuse the mortgage term and amortization. But in fact, theyre completely different.
Term The mortgage term is the amount of time that you are committed to your current mortgage contract with your lender. Youre also committed to the current interest rate and terms of the mortgage during that time period until the term ends. Typical mortgage term lengths are usually five years, though they can be shorter or longer depending on the deal you strike with your lender when you first take out your mortgage.
Once the mortgage term expires, you will either need to have paid off your entire loan amount in full, refinance your mortgage, or renew your mortgage, either with your current lender or a new one. Usually, your new term will have a different interest rate and conditions.
Amortization The mortgage amortization period is the entire length of time that you have to pay off your mortgage amount in full. In Canada, the maximum amortization period allowed is 25 years, though uninsured mortgages may go as long as 30 years. An uninsured mortgage simply means that at least a 20% down payment was put forth, allowing the borrower to avoid having to pay mortgage default insurance, which well discuss later.
It also means the total amount paid for the loan will be much less because less interest will have to be paid over the life of the loan. However, the monthly mortgage payments will be higher in order to pay off the loan faster.
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Is It Worth Refinancing For 1 Percent
Refinancing to save 1 percent is often worth it. One percentage point is a significant rate drop, and it should generate meaningful monthly savings in most cases.
For example, dropping your rate 1 percent from 3.75% to 2.75% could save you $250 per month on a $250,000 loan. Thats nearly a 20% reduction in your monthly mortgage payment.
Those monthly savings can be put toward daily living expenses, emergency funds, investments, or paid back into your mortgage to pay the loan off early and save you even more in interest.
Refinancing for a 1 percent lower rate
| Loan Balance | |
| Worth It? | Yes, if you keep the loan ~2 years or longer |
Keep in mind, breaking even with your closing costs isnt the only way to determine if a refinance is worth it.
A homeowner who plans to move or refinance again before the breakeven point might opt for a noclosingcost refinance.
So Should You Pay Off Your Mortgage Early
If you find yourself with a little extra cash at the end of the month, should you put it toward your mortgage loan? Theres no simple yes or no answer. There are both risks and benefits to paying off your loan early, and the right decision will be different for everyone. In this section, well look at a few instances in which it makes sense to pay off your mortgage early and when it doesnt.
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Consider An Offset Account
An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
For example, for a $500,000 mortgage, $20,000 in an offset account means you’re only charged interest on $480,000.
If your offset balance is always low , it may not be worth paying for this feature.
How Much Should I Spend On A House
Anaffordability calculatoris a great first step to determine how much house you can afford, but ultimately you have the final say in what youre comfortable spending on your next home. When deciding how much to spend on a house, take into consideration your monthly spending habits and personal savings goals. You want to have some cash reserved in your savings account after purchasing a home. Typically, a cash reserve should include three months worth of house payments and enough money to cover other monthly debts. Here are some questions you can ask yourself to start planning out your housing budget:
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Adding Extra Each Month
Simply paying a little more towards the principal each month will allow the borrower to pay off the mortgage early. Just paying an additional $100 per month towards the principal of the mortgage reduces the number of months of the payments. A 30 year mortgage can be reduced to about 24 years this represents a savings of 6 years! There are several ways to find that extra $100 per month taking on a part time job, cutting back on eating out, giving up that extra cup of coffee each day, or perhaps some other unique plan. Consider the possibilities it may be surprising how easily this can be accomplished.
How To Use The Maximum Mortgage Calculator
Not sure where to start? Let us help you:
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Know What Percentage You Have To Pay As A Down Payment
The minimum down payment you need will depend on the price of the home you want to purchase. If the price of a home is $500,000 or less, youll need a five percent down payment. If the price of the property is over $500,000 but less than a million, then youll need five percent on the first $500,000 and then ten percent on the remaining amount. So if you want to buy a house worth $600,000, your down payment will be $35,000 . Depending on where you want to buy, the type of property and size, the purchase price will range wildly. For example, the average condo for sale in Toronto costs about $600,000, while the average Toronto house price is upwards of $1,000,000.
