Saving money is an ongoing process. In order to save significant money you need to go beyond the normal advice of cutting coupons and decreasing the number of lattes you buy.
Sure, cutting small expenses can help you save a few bucks. But is it going to make a big difference in your life?
My goal is to show you ways to save big! Thousands of dollars a year and tens of thousands of dollars over your lifetime.
Smart people want smart ways to save money that have a big financial impact.
Saving $5 a week is great. But what about saving thousands a year? I'll take the latter.
5 Smart Ways to Save a Lot of Money on Your Mortgage
1. Improve your credit.
This is the most basic advice I'm going to give you about saving money. Better credit means lower interest rates and lower payments on big purchases like homes, cars and other big purchases.
Don't shoot yourself in the financial foot because you didn't take maintaining your credit serious.
I've written extensively about improving your credit. Stick to the basics and improve your credit as much as possible.
2. Switch to a bi-weekly mortgage payment.
By switching to a bi-weekly mortgage payment you are making one extra payment a year.
It might not sound like much but it can make a huge difference in how much interest you pay over the life of your loan.
Using this simple bi-weekly mortgage calculator I used assumptions of a $300,000 home loan over 30 years at a 5% interest rate.
The normal monthly payment is $1,610.46. By switching to a bi-weekly payment of $805.23 I was able to shorten my mortgage to 25.3 years and save over $50,000 in interest over the life of the loan.
That's real money! Wouldn't it be nice to take that money and add it to your retirement accounts or your college savings accounts?
3. Make an extra monthly payment.
You don't have to make a full mortgage payment. Just do what you're comfortable doing.
Using this mortgage calculator and the same loan assumptions from above I calculated what would happen if I made an extra loan payment of $150 a month.
The results are surprising. That extra $150 a month shortened my loan by 5 years and 2 months and saved me $55,605.
Again, this is real money. Either you keep it for yourself or you pay it to the bank. I'd rather keep my money!
4. Refinance your home loan.
With current rates being so low a home loan refinance might be a realistic way to save money on your home loan.
Use this refinance interest savings calculator to run your own numbers.
In most circumstances you can lower your interest rate and your monthly mortgage payment. This leaves you more cash flow to save and invest for other goals.
Refinancing your home loan can also be a smart way to consolidate high interest credit cards. If you have some equity you could do a cash-out refinance and use that cash to pay off the credit cards essentially rolling the high interest debt into your low rate mortgage.
5. ADVANCED: Refinance and use the difference to make an extra monthly payment.
This is awesome! Let's assume you decide to refinance your home loan to get a lower interest rate and a lower mortgage payment.
What would happen if you refinanced and then used the money you saved on your monthly payment to make an extra monthly payment.
Here's an example...
$300,000 loan at 5.5% over 30 years. Let's assume you're 4 years into the loan so you've already made 48 monthly payments.
Rates have dropped so you want to refinance to a 25 year mortgage at 4.5%.
Just by doing the refinance you'll save $133 a month by getting a lower mortgage payment. You'll also save $60,524 in interest over the life of the loan.
Some people might say "this is great" and leave it at that.
Not us! Let's add some rocket fuel to the savings by taking that $133 and making an extra monthly payment.
Use this calculator and your new mortgage numbers with an extra monthly payment of $133 a month. Your new home loan balance from the refinance is $282,415.01 over 25 years at a 4.5% interest rate.
By making the extra payment of $133 you were able to shorten the loan an additional 3 years and 5 months and save another $28,246 over the life of the loan.
So by using a refinance in tandem with a small extra payment we were able to shorten the loan to a total of 21 years and 7 months. In other words we shaved 4 years and 5 months. You also saved $88,770.
What!?! That's crazy awesome savings!
The key is to use at least one of these smart ways to save money right away. Instead of worrying about skipping the morning cup of joe go ahead and enjoy your coffee knowing you're saving tens of thousands of dollars on your home loan.