Smart Mortgage Strategies to Cut Costs and Reach Homeownership
Mortgage rates have become a topic at the forefront of homebuyers’ and homeowners’ minds alike, and for good reason. Based on decisions made, it can significantly impact monthly budgets and long-term financial health.
Russ Strazzella lists out several mortgage strategies in his guide, ranging from mortgage payments to loan lifespans, and offers a path for borrowers to get an edge in managing their mortgage debt. Learn more below.
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Mortgage vs. Loan
One of the most straightforward mortgage strategies is choosing a 15-year mortgage rather than a 30-year loan. For example, Strazzella uses a hypothetical $300,000 loan, comparing the two options. It shows that a 15-year mortgage at a lower rate, such as 5.5%, versus a 6.5% rate for a 30-year loan results in paying $212,000 less over the life of the loan.
Industry data also supports this, but it should be noted that monthly payments for a 15-year loan are typically higher. Strazella makes note of the higher monthly cost, which is not always feasible for everyone.
However, for those who can afford it, the savings over the long term are substantial and lead to faster home ownership and lower total interest paid.
Extra Mortgage Payments
For those choosing a 30-year mortgage, Strazzella recommends making one extra mortgage payment per year. By budgeting just a small amount less monthly, borrowers can save over $1,200 annually to apply as an additional payment on the mortgage. This can reduce the loan term by several years and also save thousands in interest.
Wells Fargo seconds this approach and emphasizes how even modest extra payments can shorten loan terms by years and save thousands. So, if you want to save more, try adding an extra payment each year.
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Buy Mortgage Points at Closing
Another potentially helpful mortgage strategy, though less widely implemented, is to buy mortgage points at closing to reduce the interest rate. According to Strazzella’s example above, spending $12,000 upfront to reduce the interest rate by a full percentage point can save almost $3,600 a year in monthly payments.
This will effectively reimburse the borrower’s upfront cost within three and a half years. After that, the borrower can enjoy savings that can go back into the mortgage or other funds, and present a compelling case for cost-conscious buyers with some available cash at closing.
Refinancing Your Mortgage
For homeowners who are already locked into a mortgage, refinancing is a great tool to lower payments or the loan duration. Strazzella deems refinancing as a simpler option for those who find all the calculations overwhelming. For instance, he claims a 1% drop in interest rates can reduce monthly payments by around 10%.
Homeowners could have the chance to even reach a break-even point on refinancing costs in less than three years when rates drop by around 0.75%, if borrowers are monitoring market conditions.
The best plan laid out by Strazella includes balancing aggressive strategies with more modest approaches to find a happy medium. Financial planning articles and experts consistently go back to these tactics to save money over time, regardless of buyers’ initial budgets or goals.
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In Conclusion
Diving into mortgage payments can be daunting. However, by balancing immediate affordability with long-term savings, you can create mortgage strategies that will save you lots of money in the long run.
Whether that means a short loan, extra contributions, investing in points, or refinancing, homeowners have multiple ways to lower overall costs and free up future funds.
As always, make sure each of these mortgage strategies works for your current situation before committing.