- Find current mortgage rates. A good general source is the Freddie Mac weekly mortgage market survey, updated every Thursday. But you can also look at real-life rates available in your area by visiting our mortgage search page.
- Decide if you want a fixed-rate or adjustable-rate mortgage.ARMs are typically cheaper but riskier.Here’s how to decide if an ARM is right for you.
- See what you could save. Use HSH’s amortizing mortgage calculator — choose “show the full table” — to compare the costs and benefits of various options.
Here’s an example: If you pay 3.8 percent on a 30-year fixed-rate home loan of $200,000, your payment (principal and interest) will be $932 a month. After 30 years, you’ll have repaid the $200,000, plus $135,489 in interest, money that could have gone to a college education for your kids or helped you retire earlier.
Reducing the term, or duration, of the loan usually saves money in two ways: You pay less total interest, and you often get a lower rate.
When I researched this story, the average 30-year fixed-rate mortgage was 3.8 percent. The average 15-year, fixed-rate mortgage had an average interest rate of just 3.07 percent. The monthly payments on a $200,000 loan would be $1,388, which is $457 higher than the 30-year version.
But you’d be done in half the time, paying only $49,823 in interest, instead of $135,489. That means you’d keep nearly $86,000 in your pocket rather than putting it in a lender’s.
If you want to shorten your mortgage’s term but 10 or 15 years feels too tight, the payments on a 20-year loan might be more comfortable.
6. Refinance and just pretend it’s a shorter loan
If locking into a shorter mortgage with higher monthly payments feels scary, you can get much the same effect by refinancing — if rates are low enough to justify it — into a cheaper 30-year mortgage but paying it off on a 15-year (or 10-year or 20-year) schedule.
You won’t enjoy the lower rates offered for shorter-term loans, but you’ll save heaps of money on interest. To stick with our sample mortgage, the new payment on your $200,000 (3.8 percent, 30-year fixed-rate) mortgage is $932. Go ahead and pretend you’re on a shorter schedule. Your monthly payment would be:
- $1,190 to pay it off in 20 years
- $1,459 to pay it off in 15 years
- $2,006 to pay it off in 10 years
Do the math yourself using the HSH calculator, or any number of other free calculators.
This option requires willpower, because you must choose a higher payment than you are required to make each month. But it gives you the flexibility of falling back to your smaller required payment if you need extra cash.
Is refinancing cost-effective?
Options 5 and 6 involve refinancing your home. Before considering those options, decide if refinancing is a good move for you.
Whether refinancing is worth it depends on the associated costs and how long you’ll stay in the home. To be a good deal, you’ll need to stay long enough to more than recoup your costs.
Refinancing is loaded with costs, including, but not limited to:
- A lender’s origination fee
- A title search fee and title insurance
- A settlement professional’s fees
- The cost of pulling your credit report
- An appraisal fee
- State or county tax and/or transfer fees
You can pay for these costs out of pocket at the time you refinance. Many lenders encourage borrowers to have the fees added (“rolled in”) to their loan balance. But if you do, your monthly payment will grow and you’ll pay additional interest.
Here’s rule of thumb: Expect to pay 2 percent to 5 percent of the loan amount to refinance, says Zillow.
Estimate your own costs using MyFICO’s refinance calculator. Also, you can shop around by telling several mortgage lenders how much you want to borrow and asking for their estimates of fees. Again, our mortgage search tool is a good place to start.
Tip: Don’t give lenders consent to pull your credit until you’re ready to actually apply for a loan.
What’s your approach to paying your mortgage? Are you trying to pay it off faster? Let us know in our Forums. It’s the place where you can speak your mind, explore topics in-depth, and post questions and get answers.