Saving money on your home
There are dozens of ways to make your housing investment pay off faster and at a greater return. In some cases, a small extra outlay may be required, sometimes every month, but the added expense is often pocket change when compared to the available savings.
If you double up on the principal portion of your house payment every month, for example, you can cut 15 years off your 30-year mortgage and save half the interest you would otherwise have paid.
Your mortgage is typically your largest monthly expense. Therefore, it offers perhaps the largest single source of potential savings.
Extra payments: Every time you make an extra principal payment you shorten your loan by a month and save a month’s worth of interest.
One extra full principal and interest payment a year will cut a 30-year loan to about 17 years, and adding the next month’s principal payment to this month’s total payment will shear the loan almost exactly in half.
Here’s an example: On a 30-year, $200,000 mortgage at 6%, the monthly payment for principal and interest is $1,199.10. But if you up the ante by $100 a month, you’ll pay the loan off in 24 years and save $49,476.40 in interest. Throw an additional $100 at your loan every month, and you’ll pay it off in just under 21 years, saving nearly $80,000 in interest.
You can save big bucks even if you add just $25 or $50 a month to your house payment, because the balance will be that much lower. But the key to being truly successful is being consistent. You can always skip an extra payment without penalty. But you will see the greatest benefit by unfailingly digging into your wallet a little deeper every month.
Make sure that you tell the lender the extra money is to be credited to principal. Also, keep your own records and check once a year to be certain that the lender has followed your instructions.
Private mortgage insurance (PMI): If you put up less than a 20% down payment, chances are good you are paying for private mortgage insurance, an amount tacked on to your payment every month to protect the lender in case you default.
By law, PMI must be canceled automatically when the loan balance reaches 78% of your home’s original value. But some lenders allow you to drop coverage when the balance falls to 80% of current value (if the loan is at least 5 years old) or 75% of current value (if it is between 2 and 5 years old).
In this economic environment, few houses are appreciating. But most borrowers can usually cancel PMI within five years as long as they have been paying on time.
The company that services your loan can provide specific information about your mortgage.
Refinancing: Maybe you have refinanced your house to take advantage of today’s low mortgage rates.
But there are other reasons to refinance apart from lowering your house payment. One is to get rid of PMI as early as possible; another is to shorten your loan term. If you switch from a 30-year to a 15-year term, for example, you will be saving years of interest payments.
The rate on a 15-year loan is typically slightly less than that on a 30-year mortgage. But because the balance will be paid off twice as fast, the monthly payment is higher. Nevertheless, the overall savings could be substantial, and you will own your place free and clear that much sooner.
Incidentally, loans can be written for any term -- 10 years, 12, 18 or even 20. So you might be able to structure your payments to end when you retire, meaning the place will be paid off when you switch to a fixed income.
Insurance: Most homeowners have all types of insurance -- hazard insurance for their homes, auto insurance for their vehicles and business insurance if they work from their houses. And therein lies another source of potential savings.
You could lower your costs by 5% to 15% by buying all your policies from the same company. Price breaks are also available if you have been with the same firm for six years or more, if you are a senior, if you are a nonsmoker, or if you have a smoke detector, burglar alarm or deadbolt lock.
Shop hard, though. Although most companies offer discounts, they all do not offer the same ones. And compare base rates, too. Some big savings may be available by switching carriers. Your home should be insured for what it would cost to rebuild, not the appraised or assessed value.
So if your lender required 100% coverage when you took out your loan, cut back as soon as possible. Why? Because the land and foundation on which the house is built are not at risk. They will not burn, and they are not vulnerable to theft, windstorm or other perils, so they need not be covered.
Distributed by United Feature Syndicate.
