by Aaron Bacus, First Coast Mortgage Funding
Purchasing a home is a significant accomplishment! Mortgage payments can be a huge chunk of your monthly expenses, so it’s important to do all you can save money on your mortgage. There are many strategies you can use to reduce your payments or pay off your mortgage faster with minimal effort. Let’s explore three effective strategies to successfully reduce your mortgage payment: refinancing, making extra payments, or negotiating with lenders. Let’s delve into the options and pro and cons of each approach to help you make an informed decision and potentially save you thousands of dollars.
1. Refinancing Your Mortgage
Refinancing your mortgage involves replacing your current mortgage with a new one, often with a lower interest rate or more favorable terms. This can be an effective way to save money on mortgage payments and reduce the overall cost of your loan.
Pros of Refinancing
- Lower interest rate: One of the main benefits of refinancing is the potential to secure a lower interest rate, which can result in significant savings over the life of the loan.
- Shorter loan term: Refinancing can also help you pay off your loan faster by opting for a shorter loan term, such as switching from a 30-year to a 15-year mortgage. This can save you money on interest payments and help you build equity more quickly.
- Predictable payments: If you have an adjustable-rate mortgage (ARM), refinancing to a fixed-rate mortgage can provide more stability in your monthly payments, making it easier to budget and plan for the future.
- Cash-out option: A cash-out refinance allows you to borrow more than you currently owe on your mortgage and receive the difference in cash. This can be useful for consolidating debt, funding home improvements, or covering other expenses.
Cons of Refinancing
- Closing costs: Refinancing your mortgage typically comes with closing costs, including appraisal fees, origination fees, and other expenses. This can be 2-5% of the loan amount. These costs can offset the potential savings from refinancing, so it’s essential to calculate the breakeven point to ensure it’s a financially sound decision.
- Extended loan term: If you refinance to a new 30-year mortgage without shortening the term, you may end up paying more interest over the life of the loan, even with a lower interest rate.
- Lost equity: In a cash-out refinance, you may be tapping into your home’s equity, which could leave you with less financial cushion in the event of a housing market downturn or other financial challenges.
2. Making Extra Payments on Your Mortgage
Another strategy to save money on your mortgage is making extra payments whenever possible. This can help you pay off your loan faster and reduce the amount of interest you pay over time. Even small extra payments made consistently can make a notable difference.
Pros of Making Extra Payments
- Reduced interest payments: By making additional payments towards your mortgage principal, you can reduce the total interest paid over the life of the loan, potentially saving thousands of dollars.
- Faster loan payoff: By accelerating your repayment schedule, you can potentially pay off your mortgage more quickly, allowing you to own your home outright sooner and free up funds for other financial goals.
- Increased home equity: Making extra payments can help you build equity in your home more quickly, which can be beneficial if you plan to sell your home or access the equity for other purposes.
Cons of Making Extra Payments
- Liquidity concerns: While making extra mortgage payments can save you money in the long run, it’s essential to consider your overall financial situation. Tying up extra cash in your mortgage may leave you with less liquidity for emergencies or other financial goals. Make sure you prioritize your financial obligations before committing to additional mortgage payments.
- Opportunity cost: Allocating additional funds towards your mortgage may mean sacrificing other investment opportunities with potentially higher returns, such as retirement accounts or the stock market.
- Prepayment penalties: Some mortgages come with prepayment penalties, imposing fees for paying off the loan early. Be sure to review your mortgage terms to determine if any penalties apply.
3. Negotiating with Your Lender
If you’re struggling with your mortgage payments or looking for ways to save money, negotiating with your lender may be an option worth exploring.
Pros of Negotiating with Your Lender
- Loan modification: Your lender may be open to discussing a loan modification, which can involve adjusting the interest rate, extending the loan term, or even forgiving a portion of the principal balance. Lenders are usually willing to waive certain fees or make these adjustments if you have a good credit history and a solid payment record.
- Temporary payment relief: In some cases, your lender may be willing to offer temporary payment relief, such as a forbearance or deferment or loan extension to help you get back on track financially.
- Avoiding foreclosure: If you’re at risk of foreclosure, negotiating with your lender can be a vital step towards finding a solution that works for both parties and keeps you in your home.
Cons of Negotiating with Your Lender
- Impact on credit score: Extensive negotiations or requesting loan modifications could potentially have a short-term impact on your credit score. However, the long-term benefits of reduced mortgage payments may outweigh this.
- Long-term consequences: While negotiating with your lender may provide short-term relief, it’s essential to consider the long-term implications of any changes to your mortgage terms and weigh the pros and cons carefully.
- Not guaranteed: It’s crucial to remember that not all lenders may be open to negotiation, and there is no guarantee that they will agree to modify your loan terms. Lenders are not obligated to offer better terms.
Other Strategies to Save Money on Mortgages
In addition to the primary strategies discussed above, there are several other ways homeowners can save money on their mortgages:
- Shop around for the best mortgage rates: When applying for a mortgage or refinancing, be sure to compare offers from multiple lenders to find the best rates and terms. Working with a local mortgage broker can make this easy because they do the shopping for you!
- Improve your credit score: A higher credit score can help you qualify for better mortgage rates, potentially saving you thousands of dollars over the life of your loan. Mortgage brokers can also offer advice and a long term plan for improving your credit.
- Choose the right loan term: Consider whether a shorter loan term with higher monthly payments but lower interest rates is a more cost-effective option for your financial situation.
- Make a larger down payment: A more substantial down payment can help you secure better mortgage rates and reduce your monthly payments by decreasing the amount you need to borrow.
- Buy mortgage points: Purchasing mortgage points, also known as discount points, can help you secure a lower interest rate in exchange for an upfront payment.
- Consider a rate lock: If you’re concerned about fluctuating interest rates, a rate lock can help you lock in a specific interest rate for a set period, protecting you from potential increases.
As a homebuyer, it’s crucial to explore various strategies to save you money on your mortgage. However, you don’t have to be a homebuying or mortgage expert to purchase a home! Working with a knowledgeable real estate agent and local mortgage broker will help you find your home, negotiate terms and conditions, and ensure you get the best rate possible.
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About the Author
Aaron Bacus has been has been in the mortgage business and originating loans for thousands of clients since 1997 and is the Vice President of First Coast Mortgage Funding in Jacksonville, Florida.