One of the biggest misconceptions people have about saving money is that they have to see the savings. Unless their savings is going into a piggy bank on the kitchen counter or directly into a savings account at the bank, many consumers feel they are not actually saving any money.
When it comes to your mortgage, however, savings can take on a whole new meaning. The biggest debt you will ever accumulate, your mortgage has the potential for substantial savings.
Understanding mortgage interest rates
Have you ever wondered why some people have a minor panic attack when they hear mortgage interest rates are jumping a half a percent from 5 percent to 5.5 percent? After all, it’s only a few extra dollars tacked onto a mortgage payment they can easily afford.
Here’s what you may not understand; if your mortgage is approximately $300,000, and you have a 35-year term with a 5-percent interest rate, you are paying about $331,000 just in interest on top of your loan. That is why most people panic when interest rates rise.
Accelerated payments are a bit tricky to understand in terms of savings. When you make weekly payments on your mortgage, you typically pay an additional $20 to $30 a week, which makes your mortgage payment roughly $100 more expensive each month.
That is not savings. However, weekly payments add up to a full additional payment on your mortgage each year, which allows you to pay it off faster. Using the same rate and terms discussed above, accelerated payments will save you approximately $70,000 in interest over the life of your mortgage.
Principal prepayments work because they allow you to pay down the principal on your mortgage. Since interest accumulates on the principal balance, you will save tens of thousands of dollars in interest over the life of your mortgage as you pay down the principal.
However, this option does not work for everyone, because it requires a significant payment each year, at least $30,000 or higher. If you have those funds, this is the best way for you to save on your mortgage over the life of your loan.
Tax refunds to the rescue
Most homeowners do not have an additional $30,000 lying around to spend on their mortgage each year. However, many Americans do receive an income tax refund. If you were to apply approximately $3,000 of your income tax refund to your mortgage each year, you could save up to $100,000 in interest.
Go with a shorter loan repayment
This is another option that might not look like it can save you any money. Because your monthly payments will actually go up when you shorten your amortization schedule, you might balk at this tactic.
However, shaving five years off your 35-year loan can save more than $55,000 in interest. Every five years you remove from your mortgage nearly doubles that savings.
Getting a great mortgage
One of the easiest ways to save on your mortgage each month is to get a great rate. The way to do this is to ensure that your credit is stellar. The best mortgage interest rates go to qualified buyers with a credit score of 760 or higher.
To get your score is this high, make all your payments on time, do not apply for any more credit cards or loans, and pay off any outstanding balances you have.
While a higher mortgage payment or large payout each year might not actually look like monthly savings, it may well be the biggest savings you will ever realize. Putting a few hundred dollars in your savings account each month for 30 years is nice, but saving hundreds of thousands of dollars over the course of 30 years provides for a much more secure financial future.