How to Save Money on Mortgage Interest Rates?
If the Pareto law works, then you can save 80% money by eliminating (or reducing) the 20% expenses in your life. It makes sense. For example, you can save $100 by not ordering a coffee for 30 days. Alternatively, you can save the same amount of money by negotiating your credit card bill or by saving money on mortgage interest rates. It is clear that the second option provides better returns.
On an average, if you take a mortgage loan worth $300,000; you will pay well above $100k in interest rates. This article talks about lowering that amount to the minimum value possible.
1.Put More Money in Down Payment
If you are in love with the house and you want to stay, for next 10 or 20 years then it makes sense to contribute a bigger down payment. Conventional wisdom asks us to pay 20%. You should consider it the minimum, but a higher percentage is desired.
I do not recommend sending a substantial sum of money if you are planning to live for just 5-7 years.
A big down payment reduces the risk that a lender has to take. Banks feel more secure in approving your application and that usually translates into lower interest rates. Furthermore, you get to tie more funds into your house which reduces your loan amount. That’s another way of saying that you will pay less money on interest.
2. Send Bi-Weekly Payments
Financial experts love this setup and rightly so. What you do is that you send a half mortgage installment every 2 weeks. Let’s say, your payment is $950. Then you are supposed to pay $475 every two weeks. This helps you pay an extra loan installment ($950) each year. If you keep up with this routine, you can pay off your loan 3 years earlier.
3. Send an Extra $1500 Each Year
Can you spare an extra $1.5k for your house? I bet you can.
Some banks do not allow you to structure your loan in bi-weekly installments. If bi-weekly payments are not possible, you can send an extra installment worth 1.5x your payment. Send it each year and the loan will be paid off 4-5 years earlier.
Even if you are using the bi-weekly system, it does not hurt to save more.
The step 2 & 3 do not provide a great return on investment. There is a reason behind this which will be covered later in this article.
4. Opt for a Shorter Plan
The 30-year mortgages were introduced after the financial crisis of 2008. It was a unique loan of its type that features small monthly payments to encourage homeownership. However, this loan is not the best option for more than 50% people. For example, if you can afford to pay an extra loan installment each year, then you should go with a 25-year or 20-year mortgage plan.
In terms of savings, the best option is the 15-year plan. First of all, It lets you quickly build your equity in the house. The interest rate savings are obvious because of the shorter plan. The interesting part is that you will pay almost 1.5x money instead of paying the double of the 30-year plan.
So, these are the most prominent ways to save money on your mortgage plan. However, we are forgetting one important thing which is the relative value of your money.
What is the Value of Your Money?
The inflation rate in the past 12 months has been 1.9%. Let’s take this percentage and calculate the value of your $100k savings after 30 years. The money becomes $56,000. Keep in mind, the inflation rate is still low. The value of money drops significantly if the inflation rate rises to 5% or more.
Considering this fact, you must realize that your actual savings are much lower than anticipated. If you are planning to save money then you must do it earlier. It is not a wise step to save interest rate worth a few mortgage payments. Your money can be better used on other things like buying a second rental property or even investing on the side.
So, which tip are you going to use? Do you think that saving on the mortgage is a wise step? If so, WHY? Let us know in the comments.
