4 Ways to Save Money on Your House Payment

For most people, their monthly mortgage payment is their largest recurring expense. Lenders typically qualify borrowers for principal-and-interest payments up to 28 percent of their gross monthly income, which is what is earned before paycheck withholding. Throw in property taxes, homeowners insurance and, sometimes, private mortgage insurance, and it’s not difficult to top well over a third of your net monthly income.

If you’re looking for extra money each month, maybe to invest or just sock away in a savings account, why not take on what’s likely your biggest monthly expense? Here are five ways to save money on your house payment.

Put more down

Obviously, coming up with a larger down payment when you purchase a home drives down the monthly mortgage payment by shrinking the amount borrowed. The question buyers ask is: “By how much?”

There are a couple of answers. First, every $10,000 borrowed at 4 percent interest on a 30-year mortgage adds about $50 per month to your payment. That’s $600 per year and $18,000 over the life of the loan. By putting an extra $10,000 down on any purchase, you’re spending $10,000 out of pocket to save $8,000 over 30 years.

Saving that little over such a long time might not seem worth it. In fact, you could put that $10,000 into a relatively safe, low-cost mutual fund for 30 years and come out way ahead. But there is another thing to consider.

If that extra down payment money gets you to 20-percent down, you can avoid private mortgage insurance (PMI), which can be quite costly. It’s typically around 1 percent of the borrowed amount per year, which means if you borrow $200,000, and don’t put 20 percent down, you’ll pay $167 per month in PMI, plus that $50 extra in interest, for a total of $237 per month or $2,844 per year.

Re-cast your loan

You’ve probably heard of refinancing a mortgage, but re-casting is its lesser-known cousin. It’s different from a refinance in that you use a lump-sum payment to reduce your loan balance without affecting the loan terms.

If you, for example, had a $200,000 loan balance, you’d be paying somewhere around $1,200 a month in principal and interest. If you came up with $50,000, you could ask your bank to apply it to your balance and re-amortize your loan. In such a case, you’d save about $300 per month. That $50,000 would save you $72,000 over the course of 20 years.

Also, if you are paying PMI because you have less than 20-percent equity in a home, re-casting with a lump sum that gets you to 20 percent would eliminate that costly monthly expense. Keep in mind, not all lenders offer re-casting. But for borrowers who do have access to it, it can be quite a savings tool.

Refinance your loan

Refinancing is the more traditional means of re-doing a home loan, and it has advantages. Unlike re-casting, which is simply a re-amortization with identical loan terms, refinancing is basically a whole new loan.

A new loan means you might be able to find a lower interest rate, which would lower your monthly payment over the same number of years. Or, you might be able to keep your monthly payment the same but reduce the length of the loan. Reducing the loan length could eliminate years of interest, saving you money in the long run. Re-financing typically requires more up-front fees than re-casting, but it’s also more widely available.

Make bi-weekly payments

Making bi-weekly payments is another long-term strategy. When you send in a mortgage payment each month, you end up making 12 payments in one year. By making half the monthly payment every other week, you wind up making 13 in a year. Your principal balance gets paid down more quickly, which shaves off the number of years on the loan. Someone with a $200,000 loan balance making bi-weekly payments rather than monthly ones would save more than five years’ worth of interest over the life of a 30-year loan.

Again, your house payment is probably your largest monthly expense. So it’s worth knowing the various ways you might be able to reduce it.