Many people assume that the opportunity for saving money on their home mortgages disappeared with the recent increase in interest rates.
Actually, nothing could be farther from the truth. There are still several ways to achieve big savings in the long-term cost of mortgage loans.
A simple and effective approach that saves the typical homeowner thousands of dollars in mortgage interest is to move from a monthly to a biweekly mortgage payment schedule by getting an iva amongst all the parties involved. This approach, not only saves the homeowner a bundle in interest costs, it helps the homeowner become mortgage free years sooner.
Here’s how it works: The homeowner enrolls in a biweekly payment program. The monthly mortgage payment is split in half and paid by automatic bank draft every other week. But because the homeowner makes 26 biweekly payments a year, the total amount paid annually is the equivalent of 13 monthly payments, or an extra monthly payment a year. (Remember, the average number of weeks in a month is 4.3, not an even four).
This extra payment is applied to reducing the homeowner’s principal balance on which the mortgage company charges interest on a monthly basis. The mortgage can be paid off years sooner and thousands of dollars can be saved.
Transferring to a biweekly payment schedule is easy and inexpensive. Many times, it does not require refinancing or any substantial changes in the homeowner’s existing mortgage loan. All that is usually necessary is to fill out a one-page enrollment form and pay a one-time set-up and administration fee, usually around $400, a relatively insignificant cost in comparison to the thousands of dollars in interest savings.
Another way homeowners can reduce costs of mortgages is to closely monitor their mortgage loan accounts. Unfortunately, the accuracy of mortgage companies which collect payments and maintain records of most mortgage loans is being called increasingly into question. For example, a recent Washington Post article reported the results of several independent studies conducted to ascertain the accuracy with which mortgage transaction were recorded. These studies revealed an error ratio of from 30 percent to 50 percent in the mortgage accounts reviewed. Not surprisingly, most of these errors benefited the mortgage company and not the borrower.
And even small errors can cost a borrower thousands over the life of the mortgage. For example, an undetected and uncorrected delay of only 90 days by a mortgage company in posting a $100 principal prepayment during the fifth year of a 30 year mortgage would cost a typical homeowner approximately $400 in additional interest.
Accordingly, I strongly recommend that borrowers, especially those who make additional principal payments on their mortgage loans, arrange to have an annual audit of their mortgage account conducted by a qualified third party to ensure accuracy in the handling of their mortgage accounts.
Another approach to achieve savings in mortgage costs is the utilization of an insurance-based, tax-deferred mortgage retirement savings program. Under this type of program, payments are made into an insured mortgage retirement account. Funds in this account will accumulate interest on a tax-deferred (and possibly tax free) basis, provided the plan is properly set up and administered to comply with IRS regulations. Funds in the mortgage retirement account may be withdrawn and utilized to pay off the loan when the balance in the account equals or exceeds the principal balance due on the loan, and when the mortgage payment is no longer a tax-effective investment. When used in combination with a biweekly payment program, a properly administered insurance-based mortgage retirement savings program provides the homeowner with the best of all worlds.
There are many other savings options available to a homeowner. But whatever you choose, make sure you investigate all savings alternatives and determine which would be the best approach based on your current financial situation and long-term objectives.
Each day a homeowner allows to pass without taking action to reduce mortgage costs represents a lost opportunity for savings, savings that over the long term could make a substantial difference in a family’s financial security.