Published: Friday, 17 Dec 2010 1:56 PM ET
NEW YORK - Don't let your biggest debt run your life. There are ways to trim your monthly costs that will move you closer to a mortgage-free retirement.
PAYING EARLY: Make one extra payment every year and apply the extra cash toward principal.
"That will cut about 8 years off your 30-year fixed loan," said Pava Leyrer, president of Heritage National Mortgage in Michigan.
There are several ways to do this. You can make a full extra payment all at once. Leyrer suggests using your tax refund.
Still, it may be easier to pay throughout the year. For example, if your monthly payment is $1,200, pay $100 each month. Another option: Some banks will deduct half the mortgage payment from your account every two weeks, which adds up to 13 payments a year.
However, a lump sum payment will shave an additional five to six months off the life of the loan, Leyrer said. That's because the amount of interest you pay will decline faster.
A note of caution: Know if your mortgage has a prepayment penalty, generally found on loans before 2008. In some cases, the penalty is only in place for the first few years and may only apply if you pay off a substantial amount (like 20 percent). This will add an extra cost if you refinance and pay down some of your debt, or sell early and pay off your loan. You also should be able to opt out of this penalty, but may see a bump in the interest rate as a result.
SEEK A LOWER RATE: You're probably aware that mortgage rates have been at their lowest level in decades. What does that mean for you as a homeowner? You could possibly shave hundreds of dollars off your monthly payment. The rule of thumb is that refinancing often makes financial sense if you can secure a rate that's one percentage point or more lower than your current loan. You will pay off the closing costs with the savings within a couple of years, and realize greater savings on interest over the life of the loan.
There are other refinancing tricks. Some of Leyrer's clients are choosing to go from a conventional, 30-year fixed loan, to one backed by the Federal Housing Administration that offers an assumability feature. It often has a lower rate, but more importantly, it allows a buyer to take on the loan if the homeowner sells the house.
For homeowners looking to increase their home's value through improvements or repairs, opt for an FHA 203K loan for expenses up to $35,000. It wraps all the loans for the repairs and renovations into the home loan and typically offers a lower rate than a personal loan.
Homeowners with jumbo loans — generally defined as mortgages over $417,000 — should consider seeking a lower rate if they come into some extra cash. These borrowers can pay off some of the loan to reduce their debt below $417,000 and then refinance. They'll be able to qualify for a conventional mortgage and likely have a lower interest rate that can slash hundreds off a monthly payment.
Others should weigh a mortgage with a shorter duration. John Stearns, a banker at American Fidelity Mortgage Service Inc., just refinanced a homeowner who had 29 years left on his 30-year fixed mortgage. The borrower refinanced into a 25-year fixed loan. He's paying $24 more each month, but will save $35,212 in interest.
INSURANCE INS & OUTS: Lenders require private mortgage insurance, or PMI, if a borrower owes more than 80 percent of the home's value. This adds to the monthly mortgage payment.
But don't get stuck paying for longer than you have to. Lenders are only required to cancel PMI when the borrower owes 78 percent of the home's value or less, Stearns noted. But borrowers can get an appraisal to prove they owe less than 80 percent and require the lender to cancel the PMI.
BE TAX SAVVY: Part of the perks of being a homeowner is that mortgage interest payments are tax deductible. To increase your deduction, make your January payment before December 31 of the previous year. That will also add up to 13 payments for the year and the bigger tax refund can be used to get ahead.
View original article: http://www.cnbc.com/id/40720989
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