As silly as it sounds, the acronym "KISS" - for "Keep it simple, stupid" - is a good strategy for homeowners who want to pay off their mortgage faster.
How so? Simple tactics are easier to execute than any strategy that's too complicated. And homeowners hear all kinds of advice when they are looking to save on their mortgages, so it's easy to get confused, says Houtan Hormozian, treasurer of the Los Angeles Metro Chapter of California Association of Mortgage Professionals.
To help take the confusion out of saving on home loans, we've gathered five simple recommendations from industry professionals that could help borrowers "k.i.s.s." their mortgages goodbye. Keep reading to find out which of these solutions could work for you.
Simple Solution #1 - Track Your Home's Fair Market Value
Do you know your home's current fair market value? If you don't, you could miss taking advantage of cost-cutting measures such as refinancing, says Frank Williams, president of the Los Angeles Chapter of the California Association of Mortgage Professionals.
"A lot of people make their payments and forget about it," Williams says. But if your home has dramatically appreciated in market value, you should consider refinancing your mortgage to take advantage of the increased equity in your home. For instance, by refinancing, you could use your equity to pay off credit card debt or fund your children's college education.
And tracking your home's value can be as easy as using a value estimator on a real estate website or on an app for your phone. You can plug in your address to get the fair market value of your home based on comparable homes in your neighborhood and sales records.
For example, Freddie Mac, the government-backed mortgage loan enterprise, has its own estimator called the Home Value Explorer (HVE), which can generate an estimate of property value in all 50 states and more than 3,100 counties with a database of about 81 million property records.
Borrowers interested in keeping up with their home's value also might want to consider a professional appraisal of their home, which might offer a more accurate figure than online home value estimators. According to Federal Reserve Board, appraisal fees range from about $300 to $700.
Simple Solution #2 - Follow the Status of Mortgage Insurance
If you put little down on your home, another simple money-saving measure is to keep up with the status of your mortgage insurance.
Mortgage insurance is "a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan," according to the U.S. Department of Housing and Urban Development (HUD). Typically, this type of insurance is required for borrowers who make down payments that are less than 20 percent of the home's purchase price.
In order to pay down your mortgage, you'll need to get rid of monthly mortgage insurance premiums (MIP) as quickly as possible, says Williams. This move saves people a lot of money, puts them in a better financial position, and secures them for the future, he explains. So how exactly do you squash this expense?
First, you need to know when your home's loan-to-value ratio (LTV) goes below 80 percent, says Williams. Mortgage insurance is kept on conventional loans until the outstanding amount on the loan drops to less than 80 percent of the value of the house.
So you need to keep an eye on your LTV to make sure your mortgage insurance premium is dropped in a timely manner. Another tip: If you make extra payments toward your mortgage, you'll reach the requisite LTV and be able to drop your mortgage insurance sooner.
For FHA loans, however, mortgage insurance remains for the life of the loan, since these government-backed loans only require 3.5 percent down. But once the LTV reaches 80 percent on this type of loan, you can consider refinancing to a conventional loan and drop your mortgage insurance as a result.
So how much could you save by dropping your mortgage insurance? Williams says mortgage insurance premiums generally cost homeowners about 1.5 percent of their homes value, meaning the MIP for a $200,000 home would be $250 on top of mortgage payments.
"Mortgage insurance is like paying double your property taxes," Williams says. "How long do you want to pay double property taxes? Get it dropped as soon as you can."
Simple Solution #3 - Schedule an Annual Meeting with Your Mortgage Professional
Did you know a calendar can be a simple, but very useful tool for helping you save money on your home loan? But mortgage due dates aren't the only events you should note on your schedule.
As a homeowner, you should meet annually with your mortgage professionals, says Fred Kreger, a branch manager at American Family Funding and a past state president of the California Association of Mortgage Professionals.
"Meeting with them every year is like getting a physical. It's a mortgage wellness plan," he explains.
Scheduling an annual meeting with your mortgage banker, broker, or lender could alert you to changes that could influence your ability to save on your home loan, Kreger says. Among those changes could be new mortgage laws, rising property values, dropping interest rates, or different loan products that could better suit your financial needs.
For example, meeting with a mortgage broker could help you determine if you should switch from a fixed-rate to an adjustable-rate mortgage.
According to HUD, an adjustable-rate mortgage is a home loan that does not have a fixed interest rate. Instead, the loan is subject to changes in interest rates, which may increase or decrease monthly payments at intervals determined by the lender.
In some cases, sticking with a fix-rate mortgage year after year could be a missed opportunity if you never consider other options that could offer lower interest rates or monthly payments, says Kreger.
"Some people just pay on a mortgage for 30 years and forget about it," Kreger says, referring to the most popular loan term for a fixed-rate mortgage. "But use an anniversary date or tax season to meet with a mortgage professional. The beginning of March is good time."
Simple Solution #4 - Monitor When Lower Interest Rates Can Save You Money
Some homeowners are obsessed with refinancing to get the lowest interest rate possible on their mortgage. But they should also figure out when refinancing to a lower interest rate is a financially sound decision.
It's true - a lower interest rate means less paid to the bank, but homeowners need to assess more than that, Hormozian says. In some cases, refinancing to a lower interest rate could actually cost you more money.
For example, lower interest rates can be negated by the refinance charges required to set up the new loan. The Federal Reserve Board's "A Consumer's Guide to Mortgage Refinancings" spells out a laundry list of potential charges and fees associated with obtaining a new loan, which a borrower might have paid the first time the mortgage was purchased.
Refinance charges such as an application fee, points, appraisal fee, inspection fee, closing fee, and title insurance (to name a few) could cost between 3 and 6 percent of a home's purchase price, according to the Federal Reserve Board.
Unless the new interest rate offers substantial savings over the course of the loan, refinancing might not be what it's cracked up to be, according to Kreger.
So how do you know if a refi is worth the cost?
According to Kreger, you should follow the "1 percent rule." Refinancing typically makes good financial sense when the new interest rate is at least one percent lower than the old one, he says.
Consider the following comparison: A 30-year fixed mortgage of $275,000 with an interest rate of 5.5 percent would translate into $287,110 in interest over the life of the loan. But with an interest rate of 4.5 percent, the total interest would amount to $226,618.
As you can see, lowering the interest rate on this mortgage by one point means saving more than $67,000.
If you got a 30-year loan five to 10 years ago, refinancing to another 30-year loan wouldn't make sense, because you have already paid down a substantial amount of your principal. Instead, it would be better to think about shortening the loan term, says Kreger.
Simple Solution #5 - Let Discipline Be Your Guide
Your best chance at paying down your mortgage is to understand the importance of saving.
"Every nickel helps," Kreger says. "You can pay off your loan quicker and lower your interest rate without refinancing by putting extra money toward the principal on your mortgage whenever you can. I'm talking about creating a habit."
One simple way to do this is to make bi-weekly payments on your mortgage to effectively knock years off a 30-year loan, according to Las Vegas-based loan officer Brian Cook.
On a traditional mortgage payment plan, it's 12 payments a year, Cook says. With a bi-weekly plan, it's 13 payments a year, which basically adds one payment a year that goes directly to the principal.
To see for yourself how much you could save with this tactic, check out this example provided by Cook. On a 30-year fixed mortgage of $250,000 with an interest rate of 4.25 percent, you could knock your loan term down to 25 years and save more than $32,000 by making one extra annual payment.
Cook says the simple act of making payments every two weeks helps instill an attitude of saving money in borrowers who might be prone to living from paycheck to paycheck.
"The wealthy stay wealthy by paying less interest," Cook says. "It takes more discipline, but they are budgeting better and building equity in their home faster."
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