How to Save Money on Your Mortgage: 5 Effective Strategies
It’s common knowledge that you’ll pay interest when borrowing money for a mortgage, but when it comes to home buying, many people don’t realize just how much that interest can add up. Say you’re approved for a $500,000 30-year mortgage at a 6% interest rate. If you make your monthly payments as required, you’ll end up paying close to $579,190 in interest alone over the life of the loan. That’s more than the loan principal itself! But don’t worry—there are ways to significantly reduce the total cost of your mortgage.
Whether you’re a first-time buyer or looking to save on an existing loan, here are five proven strategies to help you save money.
1. Drop PMI (Private Mortgage Insurance)
Private Mortgage Insurance (PMI) is required if your down payment is less than 20%. It can add hundreds to your monthly payment. The good news? You don’t have to pay PMI for the life of your loan.
Once you’ve built 20% equity in your home, you can request to have PMI removed. By dropping PMI, you could save thousands of dollars each year. Be sure to contact your lender once your home has appreciated or you’ve paid down enough of your mortgage to reach this equity threshold.
Pro Tip: Keep track of your home value and mortgage balance so you know exactly when to request the PMI removal.
2. Utilize a Mortgage Calculator
Before taking on a mortgage, it’s essential to understand how much you’ll actually be paying over the loan term. Mortgage calculators are valuable tools that help estimate monthly payments, total interest paid, and the effects of various loan terms.
By adjusting loan variables such as term length and interest rate, you can see how different payment strategies will impact your bottom line. This will also help you budget more effectively and identify cost-saving opportunities.
Pro Tip: Use the mortgage calculator to simulate making extra payments or changing the loan term from 30 years to 15 years. You’ll be surprised at how much you can save in interest!
3. Recast Your Loan
Loan recasting is a lesser-known strategy that can save you thousands. After making a significant lump-sum payment toward your mortgage principal, you can request your lender to “recast” or recalculate your loan based on the new balance. This reduces your monthly payment without changing the loan term or interest rate.
The best part? Recasting typically involves a low fee compared to refinancing, and it’s a great way to lower your payments while keeping your existing loan terms.
Pro Tip: Check with your lender to ensure they offer recasting as an option before making a large principal payment.
4. Refinance Your Mortgage
Refinancing can be one of the most impactful ways to save on your mortgage. When you refinance, you’re essentially replacing your existing loan with a new one—usually at a lower interest rate.
With interest rates often fluctuating, timing a refinance when rates are low can save you tens of thousands of dollars over the life of your loan. You can also choose to switch to a shorter loan term (e.g., from 30 years to 15 years) to save even more on interest, although this will increase your monthly payment.
Pro Tip: Watch market trends or consult with a mortgage advisor to see if refinancing makes sense for your financial situation.
5. Make Principal-Only Payments
One simple yet effective way to save on your mortgage is by making additional principal-only payments. By paying more than your required monthly payment and applying the extra amount directly to your principal, you reduce the loan balance faster, which in turn reduces the interest you’ll pay over time.
Even small amounts can make a significant difference. For instance, adding an extra $100 to your principal payment each month could shave years off your mortgage and save you thousands in interest.
Pro Tip: Make sure to specify with your lender that any extra payments go toward the principal balance.
Conclusion
Paying off a mortgage may seem overwhelming, but with these strategies for how to save money on your mortgage: dropping PMI, utilizing a mortgage calculator, recasting your loan, refinancing, and making principal-only payments—you can save a substantial amount of money. Remember, even small adjustments can lead to significant long-term savings. Take control of your mortgage today, and start working toward financial freedom.