How To Save Money On Your Home Loan

You don’t have to be an expert to save money on your home loan, just interested enough in the concept to understand a few ideas that may work for you.

The debate on whether you should rent vs. buy, or pay ahead on your mortgage vs. invest in retirement, pay off more expensive debt, invest in life insurance, or even save for a child’s education are all individual circumstances that won’t be covered here, but are good topics to investigate more if you’ve wondered about them. If you want to consider other factors like the cost of a dollar today vs. tomorrow and tax write-offs, these scenarios might be left for a discussion with a financial advisor.

For now let’s focus on some tips that can be done now, in today’s economy and current legislation.

  1. Ask your current lender to modify your mortgage for free.
  2. Under President Obama’s stimulus plan aka the federal Making Home Affordable Program, homeowners may be able to modify their mortgage, reduce their interest, refinance, defer payments or even transition out of their loan/home without foreclosing. Many lender websites reference this plan and you may be able to reduce your payment by taking advantage of this program. This program was extended in January of 2012 to offer help through December 2013, so even if you pursued this option once unsuccessfully, it may be worth trying again.

  3. Refinance to a lower rate at another bank
  4. As always, check rates keeping points, term, and other factors the same across lenders. Other lenders may offer lower rates, especially if your credit is good. Try local lenders vs. the “big banks” for more flexibility with rates.

  5. Refinance to change your term
  6. Reducing the term (loan duration) will usually raise your monthly payment but can offer significant savings over the long term. Likewise, raising the term will usually lower your monthly payment, but cost you more over the long haul. Assess your situation and determine whether an opportunity exists for you. Do you need lower monthly payments to help ends meet now? Or do you want to reduce the amount of overall interest you pay in the duration of your loan? Make sure to do the calculations yourself, as you’d be surprised how much interest can add up over the typical 30 year loan, vs. a 20, 15, or even 10 year one.

  7. Leverage your credit at local banks
  8. Everything is negotiable, even your loan. If you have excellent credit, you may be able to refinance at no cost by demonstrating you are a safe risk. Consider that the lender you approach is making nothing off of you now, as you are not yet their customer. If you refinance your house with this new lender, they stand to make a substantial amount over the loan term. If you represent a safe risk (stable salary, excellent credit), you might be able to negotiate the terms of your refinancing.

  9. Move / Downsize
  10. This option is likely only available to individuals who are not upside down in their mortgage (meaning, to those who owe less than their house is worth), and who have savings to cover the loss. In some cases if you sell your house at a loss and downsize, you still may reduce your overall loss than just staying/paying the same payment or risking foreclosure. Other considerations like school zones, security, etc. will all be a factor in deciding if this option is viable.

Net, be proactive to take advantage of the lower rates currently available and the stimulus program. Check out the Making Homes Affordable Program with your existing lender to see if the program can help with your situation. Lastly, if you have good credit, leverage it to see if you can negotiate the terms of a new loan.

What other tips do you have to help save money on home loans? Let us know in the comments below!

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About Mike Acton

Mike Acton is a corporate chemical engineer that holds his family to high standards when it comes to "the spreadsheet" as they fondly call it (aka the family financial plan). Mike believes that planning, rigor, and well-calculated risk are the keys to long term financial comfort.

3 comments
SarahMurphyFlynn
SarahMurphyFlynn

Easier said then done on this stuff. We have tried to modify twice. It is a huge mess and there are tons of complaints out there against the mortgage companies, they drag their heals on your paperwork, loose your paperwork, say you missed the deadlines when you didn't. You can never talk to the same person on the phone so no one is responsibly for their mistakes. I haven't run into one person yet that has been able to get a mortgage modified. We were approved the second time after a 7 month back and forth with our paperwork ordeal, but I'm skeptical about it. We have to pay our mortgage for the next three months at a certain rate and then it is set into action. However, I've heard they botch it up at this stage too and then deny you. Very frustrating. I think a lot of people are upside down on their house like we are, there are really no options for this so you end up being stuck in your house and can't move. You could do a short sale, but you take a hit on your credit.

clcooper
clcooper

What a great rate you are sitting on Dave! But "if the economy goes into the tank"?.. Just wondering how much deeper in the tank does it have to go? lol! Loving the site, Congrats to you and Heather for getting it live!

davevandewalle
davevandewalle

Great stuff, Mike...though I think item 6 could be "get lucky..." We went with an adjustable rate ("3/1") mortgage in 2004. It had a clause that said they'd add 2.75% to the 1 year constant maturity as posted by the Fed. (Whatever that means...) Long story short, we haven't paid more than 3.5% for the past three years. Though it's not fixed - if the economy goes into the tank, then, well, we might have to refi!

Thanks for weighing in!

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