Smart Strategies to Save Money on Your Mortgage
Buying your first investment property can be a time-consuming process. There’s plenty to learn when it comes to finding the right property and going through the process of securing that first mortgage.
But mastering the ins and outs of investing doesn’t end with the purchase of that first investment property.
There’s a lot to learn when it comes to your mortgage.
Mastering practical and smart strategies designed to save money on your mortgage is critical to saving you money in the long run.
We’re going to go through some effective tips to reduce your mortgage cost and boost your savings
1. Refinance to a Lower Interest Rate
Refinancing a mortgage is a common way to lower interest rates that can result in significant savings over time.
Refinancing a mortgage involves replacing your existing home loan with a new one, typically to obtain better terms or take advantage of lower interest rates.
It’s important to research current interest rates and monitor the market to determine if interest rates have dropped since you obtained your initial mortgage. Lower rates can potentially save you money over the life of the loan
Consider the closing costs associated with refinancing, including application fees, appraisal fees, and attorney fees. Compare these costs to the potential savings from refinancing to ensure it makes financial sense in the long run.
It’s also important to shop around and obtain quotes from multiple lenders to find the best refinancing terms.
Remember to carefully consider the benefits and costs associated with refinancing to ensure it aligns with your financial goals. Consulting with a mortgage professional can provide personalised advice based on your unique circumstances.
2. Make Extra Payments:
Consider making extra payments towards your mortgage principal whenever possible. This will largely depend on your financial situation and may not be a possibility for everyone
But even small additional payments can shorten the loan term and reduce the total interest paid. Many homeowners will make lump sum payments when they receive a ‘windfall’, such as a bonus, tax refund, or inheritance
This can have a significant impact on reducing your principal balance. It’s also important to check with your lender regarding the process for making additional payments – some lenders have specific instructions or limitations, so clarify any requirements or restrictions
3. Consider an offset account
It might also be worth setting up an offset account to help save on interest. An offset account is a regular transaction account that is connected to your mortgage
The balance in the offset account is subtracted from the outstanding principal of your mortgage when calculating the interest charges. This means you only pay interest on the remaining loan amount after deducting the balance from the offset account
For example, if you have a mortgage of $300,000 and an offset account balance of $50,000, you only pay interest on $250,000. This can result in significant interest savings over the life of the loan.
In countries like Australia, the interest earned on funds in an offset account is not subject to tax, which provides additional tax advantages compared to keeping funds in a regular savings account
A big downside of offset accounts is the fees sometimes associated with these accounts, as some lenders may charge an annual fee or higher interest rates
4. Go with a Shorter Loan Term
Opting for a shorter loan term, such as a 15-year mortgage instead of a 30-year mortgage, can save you a substantial amount in interest payments. The major advantage of a shorter loan term is the potential for significant interest savings
As the loan is repaid over a shorter period, the total interest paid over the life of the loan is considerably lower compared to a longer-term loan. This can lead to massive savings in the future
A shorter loan term also means you build equity in your home more quicker. Each monthly payment goes toward reducing the principal balance, allowing you to own a larger share of your home in a shorter period.
But remember, choosing a shorter loan term requires careful consideration of your financial capabilities, goals, and priorities.
It’s important to assess your financial situation, weigh the benefits against the higher monthly payments, and ensure that a shorter loan term aligns with your long-term financial plans.
5. Avoid Private Mortgage Insurance (PMI):
If your down payment or deposit on the mortgage is less than 20% of the home’s value, you’ll most likely have to pay private mortgage insurance.
PMI will typically be included in the lender’s conditions to protect them in case the borrower defaults on their mortgage payments.
To save money and avoid paying PMI, focus on building up your equity and save to meet that 20% threshold
6. Consider Bi-Weekly Payments
Splitting your monthly mortgage payment into bi-weekly mortgage payments can result in an extra payment each year. This means making 26 payments per year, which is equivalent to making 13 monthly payments.
By adopting this strategy, you effectively make one extra payment per year compared to the traditional monthly payment schedule. This additional payment reduces your principal balance at a faster rate, helping you pay off your mortgage sooner and save on interest costs
7. Negotiate Lower Closing Costs
When applying for a mortgage, you actually have the power to negotiate with the lender to reduce closing costs. It’s always a good idea to be as prepared as possible for these discussions.
Gather as much supporting documentation as you can to strengthen your case, including bank statements, pay stubs, tax returns, or any other financial documents that demonstrate your financial hardship or the need for payment adjustments.
A good way of being prepared is also familiarising yourself with options available from the lender and what adjustments you’re seeking. It’s then all about clearly communicating what you’re after.
If you don’t feel you’re well-versed in the science of negotiation, there are a range of resources at your disposal, or consider seeking guidance from a professional!
Implementing these smart strategies is a great way to effectively save money on your mortgage and improve your long-term financial well-being!