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Five proven ways to cut mortgage costs

Sarah Tann

Let's not sugarcoat it: High mortgage costs can be a real pain in the butt.

In fact, some 84 percent of homeowners say mortgage costs are a big concern for them and that "high interest rates, high payments, and taxes and escrow are the top three most frustrating issues regarding consumers' current mortgages," according to a September 2012 mortgage study conducted by Carlisle & Gallagher Consulting Group, a management and technology consulting firm.

The good news: There are ways to alleviate some of this financial stress.

Keep reading for some proven tips on how to cut your mortgage costs.

Tip #1 - Refinance Your Mortgage

What makes refinancing your mortgage a buck-saving option?

For starters, refinancing, which is the process of paying off your existing mortgage with a new one, could help you lower your monthly payments if you qualify for a lower interest rate.

Perhaps that's why Joffrey Long, president of Southwestern Mortgage in Granada Hills, California, says that refinancing is a viable option to help lower mortgage expenses.

"Any consumer, at any time, who has a mortgage and is paying interest should be aware of the opportunity to refinance," says Long, who is also the education chair for the California Mortgage Association.

And the opportunity to refinance could result in huge savings.

Where's the Proof? Consider this example from "A Consumer's Guide to Mortgage Refinancings" published by the Federal Reserve Board, which oversees national monetary policy and banks. It compares monthly payments on a 30-year fixed-rate loan of $200,000 at 5.5 percent and 6 percent:

Monthly payment @ 6 percent $1,199
Monthly payment @ 5.5 percent $1,136
The difference each month is $63
Over 10 years, you will have saved $7,560

That's a considerable amount of savings for just a .5 percent interest rate drop, isn't it? Now just imagine how big your savings would be if you could lower your interest rate by 1 or 2 percent.

However, it's good to keep in mind that refinancing is not for everyone, says Long, and that costs and long-term property plans are things to consider before taking this big step.

Tip #2 - Shop Around for a Super-Low Interest Rate

Whether you're perusing for your first home loan or thinking about refinancing your existing mortgage, shopping around is a key cost-cutter when it comes to your mortgage payments.

According to Long, shopping around is one of the most important ways for homeowners to cut mortgage costs, but unfortunately, some people overlook it because they're too comfortable with their current bank.

"There's a comfort level that people have with big banks," Long says, "and it makes sense because they've been with the bank for many years. But, it's a good idea to check with independent mortgage bankers and lenders to make sure that the rates you're receiving are indeed competitive."

Where's the Proof? "Shopping, comparing, and negotiating may save you thousands of dollars," says the Federal Reserve Board. Just think about it: If you don't compare rates from multiple lenders and banks, how will you truly know if the rates you're receiving are indeed the lowest?

Tip #3 - Take a Second Glance at Your Home Value

When the value of your property goes down, it's not the best news in the world. One upside, however, is that you may not have to pay as much in property taxes, and that could be great news.

And because property values fluctuate up and down depending on the real estate market, it's always a good idea to reassess your home's worth to make sure you're not paying more than you need to in property taxes.

In fact, "After several years without a reassessment, some properties will be over-assessed and some will be under-assessed," notes the New York State Department of Taxation and Finance's website. "This is because some properties will have increased in value, while others may have decreased or stayed the same. Without a reassessment, all of the properties will continue to pay the same amount of taxes."

That's why Long says reassessing your home is important. "If your home is assessed at more than it's worth, a reassessment could help reduce property taxes," he says.

Where's the Proof? Just consider this example from the New York State Department of Taxation and Finance:

  Property A Property B
Market value 20 years ago 100,000 100,000
Taxes 20 years ago $2,000 $2,000
Market value today 300,000 150,000
Taxes today, after a reassessment $2,667 $1,333

So what's the big takeaway here? If you don't reassess your home value, you could be paying much more in mortgage costs than you have to.

Tip #4 - Give Your Credit Score a Healthy Boost

Oh, credit scores...they can make life amazing - or incredibly miserable. And when it comes to cutting your mortgage costs, a good credit score could be the difference between beautifully low or unpleasantly high payments.

Why? Because according to a consumer credit guide published by Federal Reserve Board, your credit score is used by lenders to evaluate how you handle your financial responsibilities. So, if you've been rather reckless with your finances, you'll likely have a lower credit score which is often reflected in a higher interest rate. Likewise, the higher your credit score, the lower your rate will be.

And this is precisely why raising your credit score is always a good idea.

"Whether you buy or refinance, raising credit does help decrease mortgage rates," says Long.

Where's the Proof? You don't have to look much further than this chart, which shows what kind of interest rates you could get - based on your credit score. The data is pulled by myFICO, a division of the Fair Isaac Corporation, with interest rates as of November 13, 2012.

760-850 2.926 percent
700-759 3.148 percent
680-699 3.325 percent
660-679 3.539 percent
640-659 3.969 percent
620-639 4.515 percent

As you can see, a good credit score can definitely work in your favor. However, Long warns that boosting your score is a long term proposition, so it may take awhile before you can reap the benefits of an improved score. "It's not just going to go up overnight, so by the time you've raised your credit score, the low rate you want may no longer exist."

Long recommends checking with your lender to find out what kind of score is necessary to qualify for the loans and rates you want - then figure out if the effort will be worth it.

Tip #5 - Make Extra Mortgage Payments

You're probably thinking this is a crazy and contradictory suggestion, but trust us - it's not.

No, this tip is geared towards people who may have a little extra money to spend and are looking to invest it wisely. In this case, by paying off their mortgage quickly.

In fact, doing so will reduce future interest costs and save you money, notes a 2011 consumer mortgage report by the Federal Deposit Insurance Corporation (FDIC), an agency designed to promote public confidence in banks.

"By adding a little more money to your monthly payment or sending all or part of your payment in sooner than you're scheduled to, you can repay your loan faster and cut your total interest costs by thousands of dollars over the life of the loan," said FDIC's associate director, Luke Brown, in the 2011 consumer report.

Where's the Proof? Let's say you had a $200,000, 30-year fixed-rate mortgage at 6 percent, with a monthly payment of $1,199. If you made just one extra payment a year (13 instead of 12), you could save $47,000 in interest and cut five years from your loan term, says Zillow in its report "7 easy ways to trim your mortgage costs."

Of course, before deciding to embark on this route, you should first determine if you have the funds necessary - and then some, says Long. He recommends having at least six months worth of household income saved up for emergencies before making any extra payments.