How to save on your mortgage costs

Refinancing isn't the only way to save money on your mortgage...

Yahoo Homes

Photo: Thinkstock

Are you looking to reduce your towering mortgage costs?

Great news: there are quite a few things you can do to lower your mortgage and fatten up your wallet.

Whether it's making additional payments or taking steps to improve your credit score, these small actions can help chip away at your mortgage costs.

Keep reading to learn more...

Tip #1 - Refinance

Refinancing is just one popular way to help reduce your mortgage costs. But what exactly does it involve?

Essentially, it's the practice of replacing your current mortgage with a new one. And according to David Stevens, president and CEO of the Mortgage Bankers Association, if you refinance now, your new mortgage will come with a historically low interest rate.

Perhaps that's why nearly 2.2 million homeowners have refinanced their mortgages not once, but twice since 2009, according to 2012 data compiled for "The Wall Street Journal" by SMR Research, a mortgage-research firm.

However, today's relatively low interest rates - recently at 3.5 percent - aren't going to last forever, Stevens says.

[Think now is the right time to refinance? Click to compare mortgage rates now.]

"When the economy recovers, we all expect rates to start rising," he says.

So, if you think refinancing could be a great cost-cutting option for you, don't wait too long to take action.

Just keep in mind that just because rates are low doesn't mean refinancing is the right option for you.

For example, the fees and costs associated with setting up your new mortgage could negate the benefits of a lower interest rate on your loan. We're talking about everything from possible loan application fees to closing costs. They can add up in an awful hurry, so make sure you take your time to weigh out the pros and cons of refinancing before you commit.

Tip #2 - Check/Improve Your Credit Score

If you plan to take our tip #1, you may want to check up on your credit score.

That's because your credit score, a written record that describes your credit history, is used by lenders to assess how you manage financial responsibilities, according to the "Consumer's Guide Credit Reports and Credit Scores," published by the Federal Serve System, which oversees the central banking system of the United States.

But before you start to panic, keep in mind that a low credit score won't necessarily keep you from saving on mortgage costs.

"If your credit score has improved, you may be able to get a loan at a lower rate," says the Federal Reserve Board in "A Consumer's Guide to Mortgage Refinancing." "On the other hand, if your credit score is lower now than when you got your current mortgage, you may have to pay a higher interest rate on a new loan."

So, before shopping for a new loan, make sure your credit report is accurate, Stevens says.

[Has your credit score improved? Compare rates from multiple lenders now.]

"A credit score is the most common indicator used by lenders to determine whether a borrower is going to be able to repay their mortgage," he says. "Protect it like you would your family jewels."

And how exactly do you "protect" it? To start, find out what your credit score is and if you need to improve it. To get started, the Federal Reserve says you can get one free credit report every 12 months from each of the nationwide credit bureaus - Equifax, Experian, and TransUnion - by calling 877-322-8228.

Tip #3 - Make Extra Payments

Sounds a little crazy, but another way to reduce your mortgage costs is to make extra payments.

"By paying a little extra on principal each month, you will pay off the loan sooner and reduce the term of your loan," according to the "Consumer's Guide to Mortgage Refinancing."

Take, for example, a fixed-rate loan of $200,000 at six percent for 30 years. You can reduce the term by three years and save more than $27,000 in interest costs by adding $50 to your monthly payment, notes the "Consumer's Guide to Mortgage Refinancing."

[Want to see if you can lower your mortgage? Click to compare mortgage rates now.]

But is this a viable option for everyone? According to Stevens, making extra mortgage payments may make the most sense for those who are nearing retirement. "Retiring without a mortgage is going to put you in a good position," he says.

Conversely, a younger homeowner may prefer to put extra income into investments, he says.

"If you have many years of earnings ahead of you, it may not be that difficult to get a higher rate of return on your investments than you'd get by paying off the balance on your mortgage," Stevens says.

Stevens encourages homeowners, both young and old, to talk to a financial adviser about the potential pros and cons of making extra mortgage payments.

Tip #4 - Get Rid of Private Mortgage Insurance (PMI)

Want to trim your mortgage costs? Try getting rid of your private mortgage insurance (PMI).

PMI usually only applies to folks who borrowed more than 80 percent of the value of their home. It's designed to protect the lender if you stop making payments on your mortgage, says the Federal Reserve Board in "A Consumer's Guide to Mortgage Settlement Costs."

And how much can PMI cost you? "On a $100,000 loan with 10 percent down ($10,000), PMI might cost you $40 a month," explains the Federal Trade Commission on its website. "If you can cancel the PMI, you can save $480 a year and many thousands of dollars over the loan."

[Want to save on your mortgage costs? Click to compare rates from multiple lenders now.]

Now that's a lot of money you could be saving, which is why you'll be happy to hear this: You can get rid of your PMI.

In fact, under the Homeowner's Protection Act, you have the right to request cancellation of your PMI when you pay down your mortgage to 80 percent of the purchase price, according to the Federal Reserve. This is an important point because lenders aren't required to automatically terminate your PMI until you reach 78 percent of your home's appraised value.

Tip #5 - Reassess Your Home's Value

We all know the housing market is volatile. But did you know that there's a way you can benefit from it?

In fact, since many Americans choose to have their property taxes bundled together with their monthly mortgage payment, a plunging property value could result in some immediate savings.

By reassessing your home's value, for example, you could learn that your home's worth has dropped and in effect, so has your property taxes. In that case, you may owe Uncle Sam less than you think.

"I strongly encourage people who own homes in communities where properties have declined significantly to get their home reassessed, and you can request that typically through your county," Stevens says. Visiting the website of your local county tax assessor is a good place to gather more info.

By clarifying your home's fair market value, you can ensure that you're not paying more than your fair share in property taxes.

Of course, you'll also want to keep in mind that an assessment could go the other way.

"If your property value has increased, you could be hit with a higher tax bill," Stevens warns.

View Comments