Owning a home is a dream for many people. However, the debt that comes with homeownership is often an overwhelming burden. Whether you want to pay off your home sooner or want to better manage your mortgage, here are five strategies for reducing debt for new homeowners:
1. Search for the Lowest Interest Rate
If you are researching interest rates or want to refinance your existing mortgage, it's important to get the lowest interest rate possible to cut down on your mortgage payments and as a result, the total amount you owe. Since interest makes up a significant chunk of your mortgage payments, reducing the interest rate could save you money throughout the life of the loan. When you are in the midst of searching for a new home, shop around for the best interest rate. You have a variety of options for interest rates – from a 15- to 30-year fixed-rate mortgage to adjustable mortgages. Compare the interest rates offered, which lenders may calculate using your credit score and other financial factors. In the event you already have a mortgage but want to take advantage of low rates, you could choose to refinance to obtain a lower interest rate.
2. Automate Payments for Mortgage
As you juggle the responsibilities of homeownership and other aspects of your life, you might lose track of making mortgage payments. Even one late payment could blemish your credit history and result in fines or penalties by the lender. To prevent damage to your credit score and lower the amount you have to pay each month in extra fines, set up automatic payments. Banks usually offer automatic bill pay for certain financial obligations, allowing your lender to withdraw from your checking account automatically. This avoids the headache of remembering when your mortgage payment is due and having to race to meet that deadline by mailing your check right away.
3. Create a Biweekly Payment Plan
While your lender will expect you to pay your mortgage payment on time every month, the payments themselves don't have to be on a per month basis. To save money on interest and help pay off your mortgage faster, consider splitting monthly payments into two. Bankrate recommends homeowners establish a biweekly payment plan, which results in you paying 13 full monthly payments by the end of the year rather than the standard 12-month schedule. You can make this process easier by setting up automatic bill pay to conform to this new payment plan.
4. Put Bonuses and Other Extra Income toward Your Mortgage
Throughout the year, you might end up with extra cash aside from the base salary or wages from your job. Shave off the time it takes to pay off your mortgage by using any extra income to toward chipping away at your debt. For example, a tax return or bonus at work could turn into an extra payment on your mortgage. This way, you don't have to worry about falling behind on your mortgage payments or have debt accumulate as fast.
5. Refinance to a Shorter-Term Loan
As you contemplate refinancing, you could also reduce the length of your loan to save money, according to Real Simple. For example, you could refinance to switch from a 30-year fixed-rate loan to a 15-year fixed-rate mortgage. The shorter time period for your mortgage means you pay less in interest during the scheduled time period. For example, if you purchased a $200,000 house and agree to a 30-year fixed-rate loan for $160,000 at an interest rate of 3.552 percent, you could pay a little more than $100,000 in interest. A 15-year fixed-rate mortgage will result in you paying about $47,000.