- Your mortgage is typically your biggest budgetary expense.Housing Market Boom image by Paul Heasman from Fotolia.com
If you are spending more than you earn and your monthly mortgage payment is further straining your financial situation, there are steps you can take to reduce the burden.
- One of the simplest ways to save money on your mortgage is to sell your current home and purchase a less expensive one. If the value of your current home has appreciated, this approach can drastically improve your financial situation when you apply the appreciation of the your home's value toward the purchase of your new home. For example, suppose you bought a $300,000 home 10 years ago and financed a 30-year mortgage at 6 percent interest. Your payment would currently be $1,760 and your mortgage balance would be approximately $250,000. If you sell your home for $350,000 and purchase a new one for only $250,000, you will now carry a mortgage of only $150,000. Your mortgage payments can now be reduced to $1,055 per month, a savings of $705 per month, or a 40 percent reduction in your mortgage payment.
- This may cost you more interest in the long run but can help reduce your mortgage payments immediately. Suppose you wanted to stay in your home but still needed to reduce your mortgage payments. You could ask your bank to refinance your mortgage, especially in situations where current fixed interest rates are lower than your current rate. Suppose you secured a $250,000 mortgage 10 years ago at a 30-year rate of 8 percent. Your payment on that mortgage would be $1,786 and your mortgage balance today would be $218,000. Now suppose the new 30-year fixed rate stood at 5 percent. Your current mortgage balance of $218,000 could be refinanced into a new 30-year loan with a payment of $1,155, saving you $621 per month. Just make sure the reduced monthly payment justifies the costs associated with refinancing.
Lump Sum Payment
- You can lower your mortgage balance by making a lump sum payment. You may have some savings or received an inheritance or insurance benefit recently and are looking for ways to improve your financial situation. Applying this money as a payment toward your mortgage can effectively reduce your mortgage payment and save you interest. A $25,000 lump sum payment to your $250,000 mortgage balance can help reduce your ongoing mortgage payment to $1,580, or a $180 month savings that would add up to $43,200 in the next 20 years.