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It's often surprising to me that, when it comes to one of the largest debts most people will ever take on, there is such a lack of knowledge or interest in learning about mortgages. They know they have to pay the money back. They know that due to interest, the loan will cost more money than the actual initial amount of the loan. And they know that a lower interest rate is typically a good thing when it comes to a mortgage. But otherwise, they often don't really get to know their mortgage and its intricacies and expenses all that intimately.
For a long time, I've found mortgages intriguing, and I've done my best to learn how to keep their associated costs to a minimum. Here are some of the rules that I've developed to better understand my mortgage expenses.
Get an Amortization Schedule from Your Lender
I'm sure that most people out there likely know what their monthly mortgage payment amount is, even if they have their payments deducted electronically directly from their bank account. I'm willing to bet though, that many of those same people don't have a clue as to how that payment is being split between interest on the loan and principal, unless they are being sent some sort of generated receipt that informs them of the breakdown.
When my wife and I took out the mortgage for our home, the bank provided an amortization sheet with such a breakdown for each payment. This is a handy tool to have in order to gauge just how much money you're paying to the bank in interest just to have the loan. As I followed this schedule, I would adjust the amounts over time as we made extra payments in order to understand how much we were able to cut off the amount of interest due with each additional payment. Watching our progress motivated us to pay more on our mortgage, literally saving us thousands of dollars in extra interest.
Factor in all Costs
There can be all sorts of extra costs involved in having a mortgage. From fees due to setting up and maintaining a bi-weekly payment structure through your lender, to mortgage insurance, mortgage application fees, refinancing costs, and similar expenses, it's important to factor in all the associated costs that can affect your mortgage in order to truly understand it's cost over time.
Gauge Progress
It may be easy when dealing with a loan payoff time that is possibly measured in decades to get a little complacent and eventually not pay much attention at all to your mortgage progress and expenses. However, by not reviewing your progress regularly, you may not fully understand just how you can have a significant impact upon the cost of your loan.
I updated our mortgage progress with each payment (regular or extra) we made. This way I understood not only how I could reduce interest costs by way of throwing additional payment amounts at the loan, but I was aware of our interest rate and how it related to the economy as a whole when compared to refinancing rates, credit card rates, possible interest earning opportunities elsewhere, and similar factors.
Understand how Extra Payments Affect Your Costs
When you begin to realize that simply applying one full extra payment a year to your mortgage could cut your interest owed over the course of the loan by hundreds or even thousands of dollars, you might begin to view such payments differently.
Since we didn't carry any credit card debt during the time we held our mortgage, and our mortgage interest rate was at 5.375 percent, I found it difficult to find a better place for our extra money. The stock market was faltering, and there was no way I was going to earn over 5 percent in any sort of bank offered account or investment. Therefore, understanding that making extra mortgage payments (without penalty of course) was our best investment option helped us build equity and reduce the amount of interest that we would owe over time.
Decide Whether Refinancing is a Good Choice
As our stint of home ownership drew to a close, interest rates began to fall into the 4 percent range. While it was tempting to refinance, we already had our home on the market, and the points associated with refinancing would likely have cost us more than we would recover in the near term by way of a lower interest rate. However, had we planned on staying in our home longer, it may have been worthwhile.
Having an idea of how long you'll be staying in your house, as well as the associated costs with refinancing, can allow you to do a cost comparison that might help you decide as to whether taking on this extra mortgage expense in the near-term could pay off over the long-term.
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