Shop around based on more than the interest rate.
Yes, shopping for the lowest interest rate will generally save you more money, but mistakes could cost you in the long run. For example, a low teaser rate on a short term mortgage will cost you a lot as interest rates rise. Choose a mortgage that has low fees as well as a low-interest rate, and it will save you that much money upfront.
There are several other factors you should consider when shopping for a mortgage that could potentially save you thousands of dollars. The first is the prepayment penalty. Ideally, there isn’t one. In every other case, you should select a mortgage that allows you to make large principal payments. Non-bank lenders typically have more generous prepayment privileges than Big Banks.
Another factor to consider is the penalties. What happens if you break the mortgage? What fees will you be hit with if you refinance at a lower interest rate or refinance the house into just your name after a divorce? What happens if you have to sell the house to move or into a cheaper place? These penalties can cost you thousands of dollars. And they’ll also come due if you refinance the mortgage with many lenders.
Ask lenders how they calculate the penalty when you break the mortgage. Most lenders require three months of interest. How they calculate that can make a big difference. Some lenders use the discount rate or the posted rates. The posted rates are generally much higher than the discount rate.
Portable loans can save you money in a variety of ways. If you can take the mortgage with you when you move, you don’t have to pay penalties for breaking the first mortgage and loan origination fees for the new one. If you have good mortgage terms, the low-interest rate you have today will remain in effect for the new residence. Or you could use the assumption of a good mortgage loan as an incentive when selling the home.
Make lump-sum payments whenever you can
Paying down debt will always save you money. Many people add extra principal to their monthly mortgage payment. While that’s good, you’ll do even better if you save up money and make a separate lump sum payment. All of that money goes directly to the loan balance. What if you don’t have any room in your budget to save up a lump sum? You can still send any “found” money toward the loan. This could be bonuses from work, an inheritance, financial gifts or a tax refund.
Suppose you have a 300,000 dollar mortgage at a 3 percent interest rate and a 25 year amortization period. Sending an extra 2,000 dollars a year toward that mortgage will save you around 18,000 dollars and pay it off six years sooner.
Accelerate your mortgage.
How do you accelerate a mortgage? The simplest solution is to switch to a biweekly mortgage. You make the equivalent to half a monthly mortgage payment every two weeks. More importantly, you make payments equivalent to thirteen monthly house payments every year. This can cut several years off the length of the loan while reducing how much interest you pay over those years.