Bringing down the cost of your mortgage sounds great in theory, but how does it look on paper? Below is a true-to-life sample of how a mortgage works and how you can bring your total payments down.

$250,000 mortgage over 30 years
5% interest rate
$1,342 total monthly payment

  • Add one extra payment per year. This method may not seem like much, but actually yields the most amount of savings. If you follow the above scenario without missing any payments, you’re scheduled to make a total of 360 payments totalling $483,139.46. The total cost of interest is $233,139.46. However, making the equivalent of 13 monthly payments instead of 12 means you’re only paying $439,164.96, where the interest equals $189,164.96.

This is a savings of $43,974.50 over the life of the loan.

Keep in mind that bi-weekly payments will give you the same results, so either option is available to you.

  1. When the time is right, cancel PMI. If you’ve put down less than 20% at closing, you’re probably paying Private Mortgage Insurance. However, as soon as you’ve paid down at least 20% of your mortgage, call your lender to cancel the insurance. This may require an updated appraisal but should shave off your monthly bill.

PMI rates range from 0.3% to 1.15% of the loan amount per year. If you have a rate of 1%, then you pay about $208.33 per month.

This is a savings of $2,500 every year.

  1. Refinance for lower rates. Once you’ve had a chance to build up your credit through regular payments, this is an excellent way to reduce your rate and gain more savings over time.

Let’s say you are now 10 years into your loan. This means the principal amount is now $203,355 with a total interest of $118,737. If your interest rate changes from 5% to just 4%, now your total interest payment is $92,394.

This is a savings of $26,342 over the remainder of the life of the loan, or about $109 every month.