Avoid Mortgage Money Mistakes – 3 Mortgage Hacks That Can Save You Thousands
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Are you planning to make your first home purchase? The idea of buying your dream home is nothing more exciting! You find a property within your budget range, set aside some down payment and compute your mortgage rate. The idea of living in your dream home is within your reach.
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Avoid Mortgage Money Mistakes – 3 Mortgage Hacks That Can Save You Thousands
But you realize, your mortgage payment is eating much of your budget.
If you are a first time home buyer, you might be unfamiliar with the real estate and mortgage terms. Thus, instead of cutting some mortgage payments, you might end up spending a lot of interest and other fees.
Below are three ways that can save you money on a mortgage. Read on.
Opt for a 15-year mortgage instead of a 30-year mortgage.
Basically, a 15-year mortgage will cost you a higher monthly mortgage. However, it will pay off your loan faster which can save more money on interest in the long run. You can have the freedom of many months or possibly years without a mortgage at all.
This kind of option, despite a higher mortgage payment, is gaining popularity among home buyers.
Suppose, you take out a $200,000 fixed-rate mortgage on a 4% interest for both 15-year and a 30-year mortgage. If you choose the 30-year mortgage, your monthly payments would be $995 per month with a total of $143,000 interest over the life of the loan.
If you would go for a 15-year mortgage, you might be paying higher at $143,700. But you can save as much as $77,000, almost 50% less of a 30-year mortgage interest rate.
However, this kind of strategy is best applied for the following scenarios:
- If you are earning decent money and you can afford the higher monthly mortgage, then opting for a 15-year mortgage works best for you. However, make sure that you do not have a lot of non-mortgage debt.
- This strategy also best fit if you have a stable job and are well-compensated. It might be riskier for a freelancer to opt for a higher mortgage payment as his income is unpredictable.
- If you are nearing retirement, that means that you will have limited fixed incomes. That said, considering a 15-year mortgage will give you less debt when you retire.
The larger mortgage payment, the better
If you want to pay off your loan faster, then it is worth considering making extra mortgage payments. According to Nick Lumpp, president of RCN Wealth Advisors in Maryland, paying extra money in the principal amount in a year can go further in the next years.
Communicate with your bank that your extra payments are intended for the principal amount and not the full loan. Otherwise, your bank will apply it to the next month’s interest. 3 Mortgage Hacks That Can Save You Thousands
If you are transacting online, you can do this by checking the box that says “apply toward principal.” If you are paying via check, you can write a memo stating that the funds are applied to the principal.
If you are paying for a $200,000 loan on a 30-year fixed-rate mortgage at 4%, still, you can save money by making some prepayments. A $100 additional prepay towards the principal amount could save you $30,000 in interest. You can also pay the loan five years quicker.
Recast your Mortgage Loan
Recasting means that you pay a lump sum towards the principal amount to reduce monthly payments – monthly principal plus interest. Your monthly payment is then reset to lower the amount due.
Suppose, you have a principal balance of $361,790 which has 25 years left on loan at 4% fixed-rate payable for 30 years. If you put a lump sum amount of $50,000 towards the principal balance and recast the loan, your new balance would be $311,790.
You still have 25 years left on loan at 4% interest rate, but your monthly payment will decrease to $264 each month for 25 years. It means that you have saved $79,200 over the life of the loan. 3 Mortgage Hacks That Can Save You Thousands
If we will subtract the lump sum amount applied on the principal balance, you will have an ultimate savings of $29,200.
According to Chris Starks, a Senior Loan Officer at First Class Financial Services, the benefits of recasting is that it’s low cost and does not require income verification or credit check. Some lenders may charge around $200 for the service, but there are no closing costs since it is considered a new loan.
A recast is cheaper than refinancing. To refinance, you need to pay lending fees around $680-$850, credit fees around $25-$65, appraisal fees around $300-$400, escrow fees, taxes, insurance fees, and title fees.
Takeaway
Building your dream home might make some changes in your lifestyle or worst compromised. However, the effect wouldn’t be that long and that much if you will apply some strategies to lower your monthly payments or pay off the loan faster.
Ask your financial adviser which of the three tips above is a good fit for you. Would you opt for a 15-year mortgage? If it is not possible, perhaps a recast on your loan after 20 years can save you more. Whatever your decision, it is still wise to cut some amount on your mortgage for your other expenses or investments.
Avoid Mortgage Money Mistakes – 3 Mortgage Hacks That Can Save You Thousands
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