How to Save Thousands a Year on Your Mortgage Payment


Once you’ve locked in a mortgage, it’s easy to think the deal is done (and a lot of the time you want to forget about the piles upon piles of paperwork you’ve just gone through). You assume you’ll make your payments on time and enjoy your new home into your happily ever after future. Sounds easy, right?

That’s definitely an option, but not the best one for the long term. Depending upon when you purchased your home and your timeframe for staying in it, there are plenty of ways you can whittle away at your monthly payment, save on interest and generally decrease the total cost over the lifetime of your loan. We’re not talking pennies here – we’re talking thousands of dollars a year.

Here are some of the best ways to do that, with examples of just how much you and your family could save on your mortgage.

Switch to a Lower Rate

You can refinance and save on interest without switching to a 15-year term. A 25-year $200,000 mortgage at 4.5%, when refinanced to 20 years at 3.5% will result in $171,619.34 less interest. That’s a savings of $8,550 per year.

It’s best to refinance when interest rates are low and you have an excellent credit score – usually 750 or higher. If you’re in the process of rebuilding your credit, consider holding off for the time being and also be sure to factor in any fees involved with the refinance process and how long you anticipate staying in the home.

Get Rid of PMI

Private mortgage insurance (PMI) is what borrowers pay when they make a down payment that is less than 20% of the home’s cost. PMI protects the lender in case you fail to make your payments in full.

Most lenders charge between .5 and 1% of the loan for PMI each year. For example, PMI on a $300,000 loan would cost $3,000 a year or $250 a month.

If you’ve reached 20% or more in equity, you can get rid of PMI by refinancing or asking your lender to drop it. Not every loan provider drops PMI automatically once you reach that threshold, so you might have to remind them. Some won’t drop PMI at all, so you’ll have to refinance to get rid of it.

Make a Bigger Down Payment

The smaller down payment you make, the higher your monthly payments will be. For example, a $300,000 home with a 3.5% down payment, 30-year mortgage with 4.5% interest rate will have a $1,467 monthly payment. A 20% down payment on that same mortgage would save the borrower more than $250 a month or $3,000 a year (and over $40,000 in interest over the life of the loan).

It will take longer to cobble together a bigger down payment, but you could save thousands of dollars on interest if you wait. Obviously, this isn’t an option for those who’ve already signed on the dotted line, but anyone still in the process of locking in their mortgage should consider taking this route.

Refinance to a 15-Year Mortgage

As you may have guessed, a 15-year mortgage comes with a higher monthly payment than its 30-year counterpart, but (and this is a BIG but) it comes with substantially less interest. For example, a $250,000 mortgage with a 30-year term and a market-average 4.25% interest rate will have a monthly payment of $1,229.85. You’ll pay $192,745.98 in interest over 30 years.

A 15-year mortgage with a 3.625% interest rate will have a monthly payment of $1,802.59, but you’ll only pay $74,466.67 in interest. That’s 2.5 times less than the 30-year option.

Helllooo money saved!

Make an Extra Payment Each Year

Making an extra payment each year can decrease your mortgage term without the hassle of refinancing every time interest rates go down. The easiest way is to divide your monthly mortgage payment by 12 and add that amount every time you write a check.

For example, if you pay an extra $100 a month for a 30-year $200,000 mortgage at 4.5% interest, you’ll pay it off five years sooner and save $31,746 in interest.

Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

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