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Your housing costs are likely the biggest expense in your budget. The median monthly mortgage payment in the U.S. is $1,200, according to the U.S. Census Bureau—and that doesn't include additional payments related to homeowners insurance and property taxes. If you're looking to save money on your mortgage, there are several strategies you can use to help reduce your total cost. This includes refinancing, making extra payments and more.
Read on for four ways to save money on your mortgage.
1. Refinance Your Mortgage
Refinancing your mortgage involves taking out a new loan to pay off your outstanding balance. You'll then have a new monthly payment that may be lower than what you were paying before. Refinancing can also be an opportunity to change the terms of your loan or lock in a lower interest rate. Both ways could help you save a significant amount of money on your mortgage. At the time of this writing, the average rate for a 30-year fixed mortgage is 2.87% (2.15% for a 15-year fixed mortgage).
Let's say you owe $150,000 on a fixed mortgage that has 15 years left in its repayment term. Assuming an interest rate of 3.25%, here's how the savings would shake out if you were to refinance to a lower rate.
|Mortgage Refinancing Savings Potential|
|Interest Rate||Monthly Payment||Total Interest Paid|
|Refinanced 15-year fixed mortgage||2.15%||$1,284||$25,619|
In this example, refinancing would shave over $14,000 off the amount of interest you'd pay over the life of the loan while also reducing your monthly payment. However, it's worth noting that refinancing typically comes with fees that can cut into your savings. Lenders set their own refinance loan fees, so it's wise to shop around for the best deal. Your credit score is also an important consideration when deciding whether to refinance. You'll likely need a minimum FICO® Score☉ of 620, though a higher score puts you in the best position to land a lower rate.
2. Make an Extra Payment Every Year
Dialing up your loan payments can help you pay off your mortgage faster—and ultimately save money on interest. You can go about this in a few different ways. One option is to funnel any cash windfalls toward your principal balance. This can include tax refunds, bonuses, raises or other "found" money you come into throughout the year. Another approach is to divide your monthly mortgage payment by 12, then add this amount to your regular monthly bill. At the end of one year, you will have made an extra payment.
That may not feel like much, but an additional payment every year adds up over the long run. Let's look at the following example:
|Extra Payment Savings Potential|
If you added just one extra mortgage payment per year, you'd pay off your balance two years earlier—and save $12,217 in interest charges.
You can save money in a similar way by paying your mortgage every other week, as opposed to making one payment per month. Making biweekly mortgage payments adds up to one extra payment per year. Just keep in mind that you'll have to check with your mortgage servicer first to see if they'll allow you to structure your payments in this way.
3. End Your PMI Early
If you put less than a 20% down payment on a conventional mortgage loan, you'll typically have to pay private mortgage insurance (PMI). It's something lenders require to protect themselves should the homeowner default on their loan. Every loan and lender are different, but it isn't unusual to pay $30 to $70 per month for every $100,000 borrowed, according to Freddie Mac.
If you make at least a 20% down payment when buying your home, PMI shouldn't come into play—but not every homebuyer can put down that much. The good news is that you can eliminate your PMI payment once you cross the 20% equity threshold. This can be done earlier if you accelerate your monthly payments to reach that threshold faster. If you purchased your home with an FHA loan, mortgage insurance won't automatically drop off and you'll have to refinance.
Another option for conventional loan borrowers is to arrange for a fresh home appraisal with your lender, which will likely cost you a few hundred dollars. If your property's value has gone up, you could drop your PMI sooner rather than later as your home value is used to determine your equity. You can also consider making one lump-sum payment that decreases your loan balance enough to get you the equity you need.
4. Review Your Budget
One of the most effective ways to save money on your mortgage is to pay it off ahead of schedule. Reexamine your budget to see if you're able to free up any extra money each month to put toward your home loan. This begins with tracking your spending to understand where your money goes during a typical month. The simple act of reviewing your bank and credit card statements could reveal areas of overspending that you can trim or eliminate altogether. If your expenses are in good shape, another option is to pick up a side gig or negotiate a pay raise to bring in some extra income.
As you decide your next move, it's important to remember that not all debt is created equally. If you have other debt with higher interest rates than your mortgage, it may make more financial sense to prioritize those accounts. You'll also want to make sure you aren't neglecting your future. Saving for retirement may not feel urgent right now, but putting it off to pay more toward your mortgage could leave you financially stranded in your golden years. Depending on your unique financial situation, you may be better off accelerating your 401(k) contributions than paying off your mortgage early.
The Bottom Line
If you're thinking about refinancing your mortgage, maintaining strong credit is key to securing a good rate. You can get your credit report from all three credit bureaus for free through AnnualCreditReport.com. Not only that, your Experian credit report and your FICO® Score based on Experian data is available for free. Solid credit can also help improve your overall financial wellness. This goes hand in hand with achieving your short- and long-term financial goals.