Your Personal Finances

Home Ownership

You can shave thousands of dollars off your mortgage costs by looking at a variety of strategies available to cut your costs. Even the smallest difference in a mortgage rate can make a huge impact on how much money actually comes out of your wallet.

For example a 0.25% decrease in your mortgage rate will save you $250 per $100,000 of mortgage each year. If you have a $300,000 mortgage spread out or amortized over 20 years that 0.25% decrease can save you $15,000 over the life of the mortgage.

But if you are in the position of setting up, renewing or renegotiating a mortgage, don't settle for the decreased posted rates at your bank. You can always negotiate a lower rate, especially if you do a lot of business with that bank or can bring more business to them by switching your other accounts.

My friend is currently renegotiating her mortgage to combine her line of credit and mortgage together. While the posted rates for mortgages are about 7.0%, she's used all her bargaining power including her long relationship with her bank (and the low rates on her current loans) to get a 4.5% rate. With a $200,000 mortgage over 25 years the difference between a mortgage at 7.0% and 4.5% is an extra savings of about $88,000.

Saving money with lower rates isn't the only way to shave thousands of dollars off of the money you fork out for your mortgage. There are a number of different ways to save money on your mortgage:

1. Changing when you make your payments. If you pay your mortgage off every two weeks instead of monthly you are making 26 payments instead of 12. This equals one extra full payment each year that is applied directly to the principal of the mortgage (the total you borrowed from the bank), paying it down a lot faster. In my friend's case, if she pays her new mortgage off bi-weekly instead of monthly she'll save an additional $20,000 on her 4.5% mortgage. (Make sure two bi-weekly payments equal a monthly payment to get the benefit.)
2. Paying lump sums throughout the year. Take your yearly tax refund or performance bonus and pay down your mortgage. The payment directly reduces the principal amount owing and therefore the amount you are paying interest on.
3. Increasing your payment amounts. When you get an annual increase in pay, instead of just pocketing the extra cash, increase your payments. Again, this extra money comes off your principal. For example, if you pay a $100,000 mortgage with a 7% interest rate off in 15 years instead of 25, your monthly payments will be nearly $200 more but you will save nearly $50,000 in interest.

As in all matters dealing with your money, speak to your financial advisor about what is best for your situation. Your advisor can look at your budget to discuss how much of a payment you can afford or he or she may even be able to help you negotiate a better deal.