By John Leo Weber, Director of Search Marketing at Geek Powered Studios
Buying a home is the biggest financial commitment that most people will ever make, so it is important to understand how mortgages work, and how to avoid the common pitfalls of taking on a mortgage. With so many moving parts in the home buying process it’s easy to get confused about the terminology, the steps, and the costs involved.
Here are a few simple ways to save some money on your first mortgage:
1. Get to 20% and Drop PMI
If you put less than 20% down on your new home, then your lender will likely require you to pay a monthly private mortgage insurance payment (PMI), which is usually between 0.5% and 1% of the total loan. On a $200k house, for example, you could be paying $2,000 per year just for this insurance. Once you have 20% of the loan payed off, you are then eligible to drop the PMI payments.
So if you want to save a few thousand dollars each year, you need to aim for putting 20% down before you buy, or speed up your payments early-on to get that 20% payed off. Pro tip: If you purchased a home that rapidly increased in property value, you can get the home re-appraised for the new value. If your home went up in value, you will hit the 20% mark faster.
2. Make 1 Extra Payment Each Year
When you make an extra payment on your mortgage, it is automatically applied to your principal balance, not the interest. When you do this, your balance will be reduced, and you will no longer have to pay interest on that principal for the rest of the loan. If you make an extra payment every year, you can drastically reduce your interest payments and shave years off of the loan. In many cases, you can save tens or even hundreds of thousands of dollars over the life of the loan by making just one extra payment. Pro tip: Consider using part of your tax return as the extra payment. This way you won’t strain your wallet when you cut the extra check to the lender.
When dealing with a large loan, making the right decisions can save you huge amounts of money over time, so it is best to equip yourself with all of the tips and tricks possible. If you want to learn more about the home loan process, the team at American Capital Mortgage Group put together a handy guide called “Your First Mortgage: What You Need To Know” that outlines some helpful stats and information about taking out your first home loan. Check out the guide to learn more!
This infographic was provided by American Capital Mortgage Group in Austin TX.