Tips to reducing a mortgage

While many people with a mortgage look forward to making the last payment, the reality is that the majority of homeowners carry a mortgage most of their life. Deep down inside, most people realize this and therefore look for ways to reduce their mortgage or at least their mortgage payment.  Depending on the individual situation, there are various handy tips to reducing a mortgage or reducing a mortgage payment.

Tips to reduce the mortgage principal

The most common way to reduce the mortgage principal (the balance of the loan) is to pay a little extra each month. It doesn’t have to be a lot and virtually every lender will apply any extra money remitted with the monthly payment toward the balance of the loan. This little bit adds up fast as just $25.00 extra month will equal $300 in the first year. For someone with a $300,000 mortgage, that may not seem like a lot but even at a 4 percent interest rate it means that every year after that, there will be $12.00 more going to principle. With 20 years left on a mortgage that will total out to over $240.00. It is over because the effects of the greater payment toward principal will add a small amount over time.  In many ways, this is similar to the “snowball” method of debt reduction. 

Several other great ways to reduce the mortgage principal happen at the buying stage. Choices here are to make a greater down payment, negotiate a lower price or buy a less expensive house. There are pros and cons to each of these suggestions. Making a larger down payment may reduce funds available to repair or decorate the new home. Negotiating for a lower price may result in the loss of the property. Buying a less expensive home may mean less room but it also means less space to heat and cool and less furniture will be needed. It also means that more money in the monthly budget can go to having fun and doing things instead of paying off a large mortgage.

Tips to reduce the mortgage payment

The first opportunity to reduce the mortgage payment comes before the home is purchased!  If the buyer chooses a fixed rate mortgage, the payment will stay relatively the same for the life of the loan.  Most buyers use an escrow account to pay for taxes and insurance as part of the monthly payment and as these go up over time, the escrow payment will go up and thus so will the mortgage payment.  Those buyers who choose a variable rate loan generally start with a lower interest rate but in time it will go up and this will generally result in a higher payment. Getting a low fixed rate mortgage is one way to have a lower mortgage payment in the future. The lower the fixed rate, the better as will be shown in the refinance discussion below. 

Once a person has a mortgage, the best way to get a lower payment is to refinance into a lower rate.  If a person has $300,000 mortgage at a 6 percent interest rate and can lower it to 5 percent, the lower interest rate will result in a savings of nearly $200 and it could be more if the original loan has been paid down some.

In some cases, merely asking the lender may be one way to get a lower interest rate and thus pay the mortgage off early and thereby saving thousands of dollars in interest payments.

Saving money is a key part of reducing a mortgage payment and hopefully these tips will help a cost conscious buyer make a better decision and help them save money and pay less for a place to live.