Saving Money by Reducing Mortgage Expenses
If you are like most homeowners, when you first bought your home you did a lot of shopping around, looking carefully for the right mortgage and carefully comparing the offers of many different lenders.
For all too many people, however, the search for money savings ends when the mortgage paperwork is signed. There are, however, many strategies smart homeowners can use to continue to save money on the mortgage.
Reducing monthly payments
Many homeowners have been inundated with offers to refinance, and refinancing a mortgage can often result in lower payments and greater financial flexibility. It is important, however, to factor in the costs of taking out a new loan.
While refinancing almost certainly makes sense if the homeowner can reduce the interest rate on the mortgage by 2% or 3%, the decision becomes a bit murkier if the interest rate differential is lower. It is important to carefully compare the costs and the benefits of such a refinance. In addition, refinancing may not make sense if you plan to sell your home prior to 18 months, since it generally takes between 15 and 18 months of savings to recover the costs involved with the refinance.
Reducing the overall cost of the mortgage
While a refinancing deal can improve cash flow and lower monthly payments, there is another way to reduce the overall cost of the mortgage, and that is by prepaying the mortgage in order to shorten the number of years, and therefore the total interest cost.
It is important of course to take the nature of the mortgage loan into account when considering a prepayment plan. It makes little sense to prepay a mortgage with an exceptionally low interest rate, for instance.
If prepayment does make sense, there are a number of ways to accomplish the goal. It may be possible to refinance the mortgage to a 15 year loan, thereby saving a significant amount of interest in the long run.
Another strategy is to simply make an extra principal payment each month, using the amortization schedule you received with your mortgage paperwork. This strategy helps the homeowner to determine when each extra payment is made, and does not lock them into the payment every month.
It is important, of course, to make sure that the mortgage loan does not carry a prepayment penalty. Some mortgage use a prepayment penalty in order to recover their costs, and it is important to make sure that this penalty does not apply in your situation.