If you have a mortgage you will recognize that it is likely to be the biggest financial commitment you will make in your life. Not only is a mortgage a big commitment in terms of the amount of money borrowed, it is also a huge commitment in terms of the length of time it takes to pay off
Once arranged most people will forget about their mortgage, just keep paying the premiums on a month by month basis, and only bother about it when it comes out of any special payment periods or when the interest rates change
But it is worth while to keep a close eye on your mortgage and if you can afford it make extra payments every once in a while. This sort of approach will not only reduce the overall amount you pay on your mortgage (reducing the interest considerably) but is also likely to decrease the overall term of the mortgage so you can end up paying your mortgage off years sooner than you had originally planned.
This article will get you thinking on ways you can save money on your mortgage, both in terms of your monthly payments and also any mortgage savings you can make long terms
And of course like with most things financial, saving money on your mortgage is a balancing act between what you need to live today, and your future wealth and prosperity say 20 years down the line, but there are situations when it will be more worth your while to pay extra towards your mortgage than it would be to put that money towards savings.
In countries such as the USA where 30 year terms mortgages are quite common (in the UK the maximum term is more commonly 25 years), it is really important to understand your options and take steps to reduce what you have to pay by as much as you possibly can
Just as a note of caution. Any calculations shown in this article are purely for illustrative purposes. I always recommend that you go and see a financial advisor in your local area who can advise on your specific situation in the area or country that you live. However, on the basis that “forewarned is forearmed” this articles outlines some of the things you should be discussing with someone appropriately qualified.
1. Negotiate a Better Interest Rate
You may be able to negotiate a better interest rate for your current mortgage -either with your current lender or by moving to a different lender (or threatening your current lender with a move to a different lender).
This situation may be appropriate if you have been with a current lender when interest rates were high and you have been on a fixed rate of interest for a number of years. Ring them up – see what you can do to reduce it.
It is possible that in order to take this course of action you may need to improve your credit score. Here is an article which may help you do this.
Here is a simple mortgage calculator. Put the “deposit” to zero and have a play with different terms and interest rates …
Even though the difference between a 4% and 6% interest rate for $200K over 30 years is around $244 per month, once you multiply that over a 360 month period then you can see what a difference the interest rate makes on the amount you pay in total
2. Make Mortgage Overpayments
If you asked most of the population how they managed their money I think the typical response you would get would be that people pay their mortgage month on month and then put any surplus they have at the end of the month towards some sort of savings accounts.
But when interest rates are low it is definitely worth re-considering this approach and rather than saving the surplus, use it to make overpayments on your mortgage thereby reducing the overall costs of your mortgage. In effect you are “saving interest” rather than “earning it” which has the added benefit of not being taxed.
Note that if you have an interest only mortgage then the benefits of overpaying will be negligible. Make sure that the overpayment is going towards the actual balance of the mortgage. Ask your lender if you are in any doubt
The simplest way to look at this is to look at the effects of overpaying.
One way to approach overpaying is to swap from making monthly payments (12 a year on the same day each month) to fortnightly payments (make them half of your monthly payment which means you make 26 a year, which in effect is one extra full payment over the year)
Here’s an illustration of our $200K mortgage at 4% interest over a 10,15 and 30 year period
What is interesting is that it is not just the total amount paid that is reduced, but also the overall term is reduced as well – meaning you will pay off your mortgage considerably faster
Here is another example, this time at 6% interest rate
What this is illustrating is that it is possible, by paying your mortgage fortnightly instead of monthly and effectively making one extra payment per year, to reduce your 30 year $200K mortgage by around $51K and reduce the term by 5 years! That is definitely worth considering
Some words of caution though – do check with your lender that you can overpay (and indeed can finish your mortgage early) without penalty. My advice, as always, is to go and see an independent mortgage advisor or financial consultant local to you who can advise on your own situation.
Note that the “fortnightly savings” and “pay an extra per year” savings are slightly different due to the way that interest is calculated on your mortgage on a monthly basis and will differ from mortgage to mortgage
I hope I have whetted your appetite to go and manage your mortgage in the same way that you would manage your other financial commitments. Remember that it is all about balancing what you can afford now, what you are likely to be able to afford in the future, and then matching the length of the mortgage and the interest rate to those parameters
I have a short video coming soon which should help add a little meat to the bones!
As always their is much to consider and the only real advise I can give is to go talk to an expert who will be best able to advise as to how to save money on your mortgage, given your particular situation.
However, here are some excellent articles on the subject of overpaying on your mortgage and saving money on your mortgage in general