Housing Costs: Turning Your Biggest Expense into Your Biggest Saving
Housing is by far the average American’s biggest expense. Of course, housing costs can fluctuate—transportation expenses slip when the price of oil drops, or the cost of food rises based on weather and crop yields.
Monthly mortgage costs, however, are still often double that of energy or other household expenses.
Many homeowners with a fixed rate mortgage have no doubt factored in this monthly expense and accepted it as a fact of life. In reality, though, this biggest expense offers the possibility for the greatest savings. By refinancing, you can reduce your monthly payments and save hundreds of dollars over the months and years ahead.
The Long View of Interest Rates and Housing Costs
A year ago, interest rates began to climb for the first time in nearly a decade; 2017 rates have increased twice—with the possibility of another hike before year’s end. Some homeowners may regret having failed to take advantage of historically low rates when they had the chance.
For those of us of an older generation, though, today’s rates still remain historically low. For example, from 1979 to 1990, interest rates were in double digits, ranging from an average low of 11.20% to a high of 16.63% in 1981. In contrast, today’s rates of 5% or even lower (depending on the day) are still very attractive, particularly if your current mortgage rate is a whole point higher or more.
Opportunities to Save on Housing Costs
For homeowners with an adjustable-rate mortgage (ARM) who fear rising rates, now is the time to refinance to a fixed-rate mortgage.
For those with a fixed-rate mortgage who can’t refinance, another way to lower monthly costs is to request your lender cancel your private mortgage insurance (PMI). This can be done when the principal balance of the mortgage is 80% or less of the appraised value. This increase of loan-to-value (LTV) happens when there is either an increase in the equity of your home due to rising home prices, or if the homeowner has made considerable renovations or made additional payments to reduce the principle.
While it may cost the expense of an appraisal, for those in markets where home values have bounced back to pre-recession levels, it could decrease your monthly payment and improve your cash flow.
Other options that could help you save include:
- Re-amortizing your loan by extending your repayment back to 30 or even 40 years. (Note: you will pay more in interest of the long term)
- Check with your local town or county to be sure your home has been properly assessed. You may be able to lower your tax bill.
- Choose an interest only mortgage.
- Look for a cheaper homeowner’s insurance policy.
If you’re purchasing a home and want a lower monthly mortgage:
- Make a larger down payment—ideally 20%.
- Ask about lowering your rate by purchasing points up front.
- Consider paying all your mortgage insurance at closing.
Whether you’re buying or have been in your own home for some time, talk with your loan officer about ways you can save on those monthly mortgage payments.