Everyone these days is talking about mortgage rates. Mortgage rates, mortgage rates. And I thought I would come to you all with a couple of quick tips or, or some hacks, as we call it, so that you can kind of get an edge on reducing your mortgage payment or reducing the life of your loan or taking a vacation every year. (Yes, you can do that. Watch.)
30 Year Mortgage vs 15 Year Mortgage
The first mortgage hack is taking your 30 year mortgage down to a 15 year mortgage. It’s very simple to do. And basically what it does is it makes sure that you’re paying less interest at the end, you pay off the house sooner. We’re going to talk about a $300,000 loan. A 30 year rate right now roughly is around 6.5%, which means this is the amount of interest you’ll pay over 30 years, $382,000 versus a 15 year. You get a little bit better rate, you’re only paying $170,000, which means in the end, you’re saving $212,000 over 15 years. That’s like $14,000 a year! So you could buy a Honda Civic every year with that much money.
Now, I know what you’re thinking. Don’t 15 year mortgages cost more per month? Yes, they do. To the tune of, I don’t know, what is that? $650 roughly. That’s not chump change. I totally get it. If this isn’t in the cards for you, you don’t want to pay $2,500 for a $300,000 house, no problem.
Make 1 Extra Mortgage Payment Per Year
Let’s pretend you’re working with a $2,000 a month budget. Most people have budgets. It’s a responsible way to be. If you have a monthly payment of almost $1,900, $1,896, you’re saving $104 a month. Okay, very responsible, very cool. If they ran, he would be happy for you over the course of the year. That means you’re saving $1,248 a year. If you were to put that onto your mortgage as an extra payment, you’d reduce your mortgage from 30 years to 26 and a half. Now I know what you’re saying. Oh my God, who cares about that? They’re not even going to live in the house that long. Why would I care? Why would I care? I feel you probably are looking for a better interest rate. (I guess most people are these days.)
Buy Points To Lower Your Interest Rate
The one way to get your rate down from six and a half to five and a half, let’s just say, is to buy points. Okay? Points gives you a discount off of your rate. One point is 0.25% off of the rate, and it costs you 1% of the loan amount. All right, I know I’m throwing a lot of numbers at you. Just bear with me. Basically, if you want to get your rate down a full percentage point, you need to buy four points. So for this particular loan, it would cost you twelve grand. I know it’s a lot of money. But wait, there’s more. All right? Spending that $12,000 will take you down from $1,896 to $1,703, okay, that’s 193 extra dollars a month you’re saving, okay? That’s not chump change. That’s good money. Okay? Now, remember, we’re starting with a $2,000 month budget because you told me I remember you said I have a $2,000 month budget. I’m not getting a 15 year mortgage. We’re saving you $297 a month. You have to spend $12,000 to do it, but we’re saving you $297 a month, all right? That is $3,564 a year. All for spending $12,000.
Now, bear with me here. You spent $12,000 on points. You saved $3,564 a year. That means you’re paying yourself back in three years and four months. Do you know what you get to do every year after that? You get to take the savings and you get to go on a vacation. You literally, by spending $12,000 when you bought your house, you can take a vacation every year after the third year you own your house. A vacation every year! All right, now tell me that’s got to be something.
Refinance Your Existing Mortgage
Now, I know I threw a bunch of numbers at you. It’s crazy. I can’t do all this. It’s way too complicated. Best thing you could do, the easiest thing you can do is just refinance. Or refinance if you want to get a lower interest rate, but you don’t want to pay for it. And you don’t care about taking a vacation every year. You just refi. You can wait, every couple of years, you monitor interest rates, wait for them to go down. And remember, a reduction in rate by 1% will reduce your monthly payment by 10%. So if you buy at 6.5% and you want 5.5%, just wait, the rate will go down, and then you can start taking your vacations after that. Just remember, refi has closing costs attached to it. A couple of thousand bucks will reset your mortgage, which means it pushes your pay off further down the road.
So, anyway, that’s the mortgage hacks for you. Whether you’re really aggressive and want to spend money to save money, or you want to keep it simple and wait to save money, we’ve got tips and more for you. Give us a call if you have any questions.