For most homeowners, the largest monthly payment we make is our mortgage payment.
The bright side is that there are several ways to save money on your mortgage payment,
and it’s really important that we learn about this stuff and take advantage of it
because the savings can be positively life-changing.
And that’s what we’re going to be talking about today.
Today we’re going to be talking about 3 ways that you can save money on your mortgage.
We’re going to start by going through each of the ways individually and showing how big
of a difference they can make and then we’re going to talk about a scenario where you put
all 3 methods together to potentially save over $100,000 on your mortgage.
Let’s get started.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
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So, in order to properly illustrate how life-changing it can be to learn how to save money on your
mortgage payment, I’m going to need to explain a few statistics first.
The first stat that you need to know is the median home sales price in America, which
as of 2018 is about $225,000 according to the real estate website Zillow.com.
The average mortgage interest rate, again as of 2018, is somewhere in the neighborhood
of 4.5% to 5%.
The median household income in the U.S. is about $60,000 a year and the typical personal
savings rate in the U.S., is roughly 6%, meaning that on average American’s save 6% of their
annual income each year.
Assuming you earned 8% per year on average on your investments, which is historically
about what the stock market has done over the long haul, and that all of this savings
were going toward your retirement nest egg (which usually isn’t the case as some of
it would be going toward major purchases like new cars, phones, and possibly down payments
on a home), you would be financially independent according to the 4% rule in a little over
45 years.
Now with all that in mind let’s take a look at the following example.
Let’s assume that John and Jane are 25 years old and take home $60,000 a year.
And let’s assume that they recently bought a new home.
They bought the home for $225,000, made a 20% down payment, received an interest rate
of 5% on the 30-year loan and as a result had a monthly mortgage payment of $966.28.
Under this scenario, assuming John and Jane did nothing to lower their housing costs,
they would pay $167,860.57 in interest.
That’s an average of nearly $450 a month, or roughly 9% of their total household income,
in interest alone for 30 long years!
But assuming nothing out of the ordinary happened, they maintain their 6% savings rate and retire
a little over 45 years down the line when they are 70 with a paid off home.
That’s not horrible, but we can do better.
Let’s look at what would happen if John and Jane took advantage of one house hack
and started paying their mortgage bi-weekly instead of just monthly.
Creating a bi-weekly mortgage payment schedule instead of just making one monthly payment
helps to save on interest because, since your making half of a mortgage payment once every
two weeks and there are 52 weeks in a year, you end up making 26 half payments throughout
the year, or the equivalent of 13 monthly payments instead of the usual 12.
Now there are a couple of things to be aware of if you do want to take advantage of this
method.
First, always make sure that your additional payments are going to be applied toward the
principle of your mortgage only.
If you don’t explicitly ask for this some mortgage brokers will put that money toward
your future mortgage payments, which isn’t going to help you very much since it won’t
actually reduce the value of your loan.
Second, be sure to check with your mortgage company before making these extra payments
because some of them only accept extra payments at specific times or even charge you prepayment
penalties.
In the case of John and Jane mortgage, they checked with their mortgage company and found
no issues so they’re going to go forward with their bi-weekly payment plan.
Under this plan, they would pay $483.14 toward their mortgage principle every two weeks,
and as a result, their mortgage would be paid off in just over 25 years and they would only
pay $135,879.94 in interest.
That’s a savings of nearly $32,000 or a little over $100 a month over the course of
their loan.
Under the same retirement scenario as before, assuming John and Jane put the money they
saved in interest on their mortgage toward their retirement nest eggs, they would be
able to increase their effective personal savings rate from 6% to 8% and retire a full
4 years sooner at the age of 66.
That’s absolutely insane!
They saved 4 full years’ worth of having to put money away to retire by simply putting
one extra monthly mortgage payment’s worth of money toward their mortgage.
A second thing that you can do to save money on your mortgage is to go for a 15-year loan
instead of the traditional 30-year loan.
This does have the drawback of making your monthly mortgage payment higher, but for the
amount of savings (and additional time without having a mortgage bill) you can get from doing
it may still be worth it, especially if you plan on staying in your house long-term.
Let’s go back to John and Jane’s example from earlier.
The value of their mortgage after their 20% down payment is $180,000.
With their interest rate of 5%, they have a monthly payment of $966.28 on a 30-year
loan and would end up paying $167,860.57 in interest.
If they instead signed up for a 15-year loan, their monthly payment would jump up to $1,423.43,
but they would only end up paying $76,217.20 in interest over the life of the loan.
That’s a savings of $91,643.37!
And what’s more is that after those 15 years when John and Jane no longer have a mortgage
payment, they would raise their personal savings rate to over 25% and become financially independent
in 25 years at the age of 65 (and that’s assuming that for whatever reason, they were
still going to be starting from zero once their loan was paid off).
A third thing that you can do to save money on your mortgage is to put a large down payment
on the home.
This is hugely important for a couple of reasons, the first is that the majority of the interest
you pay on a mortgage is paid in the first several years of the loan.
For example, on John and Jane’s 30-year mortgage from earlier, they paid 20% down
and had monthly payments of $966.
Of that $966, $750 of it went to interest in the first month of the loan, and only $216
went towards the principle.
As a matter of fact, it would take John and Jane 16 years and 3 months until the majority
of their monthly payment went toward paying down the principle instead of the interest.
That’s over half of the time of the loan that is spent paying mostly interest!
The second reason a large down payment is important is that if you don’t put enough
money down on the home (usually 20% is the minimum recommendation) you might be forced
to get private mortgage insurance or PMI.
This is basically a way for the lender to protect their investment in the event that
you have to default on your mortgage.
The sad part for the home buyer is that the PMI does nothing to help pay down the mortgage,
really it delivers no value to you whatsoever, as a buyer and it can cost anywhere from 0.5%
to 1% of the total amount of the loan every year, and sometimes even more than that.
And that can be a real pain.
Think if instead of putting 20% down on the home, John and Jane instead only put 5% down
and got PMI.
Well now the value of their mortgage would be $213,750 instead of $180,000 and their
PMI could be costing them anywhere from $90 to $180 a month!
Oh, and since the loan is higher than it was before, so is the mortgage payment and interest
costs.
Under a 30-year loan, John and Jane’s monthly payment would be $1,147.46 instead of $966.28
and they would pay about $200,000 in interest instead of $167,000.
So that’s another $80 to $90 a month going toward interest than it would’ve been with
the 20% down payment.
Under 15-year loan, we’d see a similar story play out with the monthly payment being $1,690.32
instead of $1,423.43 and they would pay about $90,000 in interest instead of $76,000.
Either way, it’s not a fun story for John and Jane.
Thankfully the same ideas can work for them in reverse if they put a larger down payment
on the home.
If instead of putting 20% down on the home they save a little while longer and put 30%
down, the value of their loan would be $157,500.
Their minimum monthly payment would be $845.49 assuming it was a 30-year loan and $1,245.50
if it was a 15-year loan and the amount of interest they would pay under a 30 and 15-year
loan would be $146,878.00 and $66,690.05 respectively.
Now just for fun, let’s look at what would happen if John and Jane did all of these things
to help save money on their mortgage.
They still buy the $225,000 home but they put 30% down on it, made bi-weekly payments,
and signed a 15-year loan instead of a 30-year loan.
In this case, John and Jane will have paid off their home in 13 years and 4 months while
paying a mere $58,594.24 in interest over the life of the loan.
Compare that to the scenario from the start of the video where John and Jane paid $167,860.57
in interest when they signed the traditional 30-year loan with 20% down but did nothing
else to save money on their mortgage and you see how big of a difference this can make.
John and Jane are free from their mortgage bill a staggering 200 months or 16 years and
8 months sooner than before and they saved $109,266.33 in interest.
That’s an average of $682.91 a month!
And if I do say so myself, that is pretty nice.
And I’d be remissed if I didn’t point out that these are by no means the only way
to save money on your mortgage, these are just three of the most common ways that I
felt could apply to the majority of people.
Depending on your situation you may also be able to lower your property taxes by having
your property reassessed, you might be able to have your monthly payments recast if you
make some large payments early on, and of course, sometimes you can refinance your mortgage
to save on interest, among other things.
So I’d encourage you to look into those things yourself and see if any of them applies
to you.
And before I wrap this video up I do want to address one of the yeah, buts that I’m
sure have already been written in the comments section.
The yeah but that I’m talking about is the “Yeah, but couldn’t you make more by investing
in the stock market instead of paying off your home?”
And the answer is, it depends.
Historically the stock market has averaged an annual rate of return of about 8%, so in
theory John and Jane could’ve done better for themselves by doing everything within
their power to get their monthly mortgage payment as low as they could, even though
that would mean they’d be paying more interest over time, and investing the difference into
the stock market, since their expected ROI was higher than their interest rate on their
mortgage.
And if they did that they may very well have done better financially.
However, an average return of 8% in the stock market doesn’t mean that you make 8% every
single year.
Over the course of 5 years let’s say you might lose 10% the first year, gain 20% the
second year, lose 2% the third year, and gain 15% and 17% in the fourth and fifth years.
Arithmetically speaking anyways, technically, that would still be an average return of 8%
per year, but it would be far from a consistent, guaranteed return.
Now that doesn’t mean you wouldn’t come out ahead investing the difference, you very
well might, especially if you stick to the plan over a long enough period of time, but
it is something you need to consider and decide for yourself.
This is personal finance, after all, it’s about more than just mathematics.
Are you going to be disciplined enough to put that excess towards your investments month
in and month out no matter what happens?
Are you going to be stressed out having that large loan hanging over your head for 30 years?
If the market crashes and you lose your job as a result in the first few years after you
buy your house, do you have a solid plan that will make sure that you are going to be okay
seeing those investments go down when you need them the most with that loan still hanging
over your head?
Maybe you do, I obviously can’t answer these kinds of questions for you, but definitely
make sure to answer them for yourself, especially if you’re investing the difference you gain
from creative financing on loans.
But that'll do it for me today once again if you enjoyed this video be sure to smash
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