Five smart tips to reduce your mortgage costs

It's hard doling out those big bucks every month for your mortgage, but luckily there are ways to lessen the burden.

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Every month, you cringe as you make that mortgage payment. It's about as unpleasant as getting a root canal. You get the point - it's miserable.

So how can you soften the blow of paying that much money on a regular basis? Glad you asked. There are several smart ways to change or reduce the amount you pay. One of the biggest drops could happen if you refinance.

"People can see a lot of savings with their mortgage, especially these days with refinancing," says Tim Sebetka, chair of the Iowa Mortgage Association.

What are some other ways you could save on mortgage payments? Keep reading to learn moreā€¦

No. 1 Smart Way to Save on Mortgage: Refinance

Could you imagine having thousands of extra dollars in your bank account each year because your mortgage costs were cut drastically? Good news: Because rates are at historic lows, refinancing could help make that happen.

"When the rates got down to 5 percent five years ago, people thought that was great. They never thought it would get any lower," Sebetka says. "Well they did, and they keep going down."

So, if interest rates were higher when you initially took out your mortgage, you might want to consider how refinancing could save you money. Even an interest rate of .5 percent lower could help cut costs, according to an example from the Federal Reserve's mortgage refinancing guide.

The Federal Reserve, which oversees national monetary policy and banks, compared the monthly payments on a 30-year fixed-rate loan of $200,000 at 5.5 percent and 6 percent, and found that a .5 percent decrease in interest rates yielded a savings of $7,560 over the span of 10 years. Again, that's from lowering your interest rate by just .5 percent.

[Want to lower your interest rate? Click to compare rates from multiple lenders now.]

But before you pick up the phone to call your lender, remember that refinancing has fees and closing costs involved. You need to talk with a financial or mortgage professional to see if refinancing is the best option for your situation.

No. 2 Smart Way to Save on Mortgage: Shorten Mortgage Life

What's another way to save on mortgage costs? Shortening the term of your loan.

In fact, shorter-term loans, which tend to have a lower interest rate than long-term loans, could save you a lot of money over the life of your loan - but only if you feel comfortable making a bigger payment each month, notes the Federal Reserve.

For example, the Federal Reserve compares the total interest costs for a fixed-rate loan of $200,000 at 6 percent for 30 years with a fixed-rate loan at 5.5 percent for 15 years:


  Monthly payment Total interest
30-year loan @ 6 percent $1,199 $231,640
15-year loan @ 5.5 percent $1,634 $94,120

As noted above, while larger monthly payments can be a bit tough to handle, the total savings in interest with a shorter-term loan should help ease the pain a bit.

And because of these potential savings, many homeowners are opting for a 15-year loan.

"We are doing a lot more 15-year loans than we have in the past," Sebetka says.

So, if you decide that your wallet can handle the larger payment each month, this is a great money-saving option to consider.

No. 3 Smart Way to Save on Mortgage: Make Extra Payments

Yes, you read that right. Making extra payments - while it doesn't sound like it - will help you save money on your mortgage costs.

Here's the logic, according to the Federal Reserve's mortgage refinancing guide: "By paying a little extra on principal each month, you will pay off the loan sooner and reduce the term of your loan."

For example, the Federal Reserve says that by adding $50 each month to your principal payment on a $200,000, 30-year loan at 6 percent, you could reduce your loan term three years and pocket more than $27,000 in interest costs.

So, can you see how extra payments now, can pay off later?

If it's hard for you to come up with some extra money each month, think of the disposable cash you are using for those fancy lattes or going out to dinner three times a week. It all adds up, Sebetka says, so you'll have to figure out what to sacrifice to come up with that extra cash.

No. 4 Smart Way to Save: Eliminate Private Mortgage Insurance (PMI)

Have you seen that little acronym PMI on your mortgage bill and wondered why it's costing you extra every month?

It stands for private mortgage insurance. And if you put less than 20 percent down when you first bought your house, your lender probably required you to take out PMI to protect them against you defaulting on the loan, Sebetka says.

So how big of a dent is PMI making on your bank account each month? Well, it can cost between .5 to 1 percent of the entire loan amount, says Sebetka.

To put this percentage into perspective, just consider that the median cost for single-family homes was $186,100 during the third quarter of 2012, according to the National Association of Realtors. That means you could be spending $155 a month on the insurance, Sebetka says.

It's also good to note that "the PMI is based on the value of your home," he says. So if you've made improvements - such as renovating the kitchen or adding new siding to enhance the value of your home, that can also offset the PMI, too."

Luckily, there are a few ways to get rid of your PMI. One option is called a piggy back loan, he says. For example, if you only have 10 percent down on your mortgage but don't want to pay PMI, you can opt to take out a second mortgage with another lender. The first lender handles 80 percent of your loan. The other lender offers up a 10 percent loan of the home's purchase price (or refinancing amount), so you would have the 20 percent down to avoid the insurance.

No. 5 Smart Way to Save: Reevaluate Your Home's Value

Do you know what your house is currently valued at? If you're not sure, it might be a good idea to find out, because if your home value has dropped, you could potentially save money on property tax.

Perhaps that's why Sebetka offers this action item for homeowners: "Have your home reassessed and see if the value has declined." If it has, "then, you will have less property taxes to pay."

To offer some insight into just how important this tip is, let's take a look at how far home values have dropped. According to S&P/Case-Shiller's home price index, which looks at single-family homes, home prices have fallen more than 35 percent in some 20 major markets from their peak in 2005 and 2006.

So, if you're looking to save on mortgage costs, do some research on the value of your home. To get started, visit the website of your local county tax assessor to gather information.

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