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According to data from Sept. 2016, 59% of homeowners didn’t have a complete understanding of the details and terms of their mortgage and wished they knew it better. When a homeowner wants to save money on their mortgage, they often turn to refinancing options, but that could end up costing more in the long run. If you don’t want to refinance your loan, here are alternative options that will still help you save on your mortgage.
- Recasting your loan
To recast your loan, you pay a lump sum toward the principal of your loan, reducing its principal balance. This overall reduction then lowers your monthly principal and interest payment. Based on the lower amount that is now due, your monthly payments are re-amortized, or reset. This option requires that initial large sum, but if you’ve recently come into a large inheritance or received a large bonus, recasting is a great option. Unlike refinancing, there is no credit check or income verification and lenders charge a much lower fee.
- Opting for a 15-year mortgage instead
A fixed rate mortgage comes with varying loan terms, and the most common of these loans are 30-year fixed and 15-year fixed. While you will have higher monthly payments with a 15-year mortgage, you will save more money on interest in the long term. In a $200,000 fixed-rate mortgage with a 4% interest, you would pay about $500 more a month, but save over $77,000 in interest rates.
- Making extra payments
Another way to save on interest over the long-term and pay off your loan sooner is to make extra mortgage payments each month. With this option, you want to make it clear to the bank that your extra payments are for the principal of the loan, rather than the full loan. Otherwise, the bank will likely apply it to the next month’s interest. You can communicate this by writing this specification in the memo of a check, or checking off a box when paying electronically.
- Cancelling the PMI
Private mortgage insurance (PMI) is initially required for many people when their down payment is less than 20%. Once your mortgage balance falls below 80% of the home’s appraised value, you can petition your lender to cancel the insurance. Often, the balance will fall if your home’s value has gone up or when you have repaid some of the principal. Although the process may require a new appraisal, cutting the PMI could save you hundreds on your monthly payments.
- Modifying your loan
For those who are having trouble making monthly payments and don’t have extra money to put towards recasting or additional monthly payments, talk to your lender to modify the terms of your loan. If you’re going through financial hardship, you may qualify for programs that adjust your mortgage rate, terms, or principal balance. Many lenders offer these options because they would rather have borrowers stay in their homes and continue making payments, even if they’re lower, than going through the process of foreclosure.
On average, homeowners have mortgage payments that make up about 16.5% of their annual household income. If you’re looking to reach this national average or go below it, try one of the methods above to save on your mortgage.