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The vast majority of homebuyers need a mortgage in order to purchase a house, and mortgages come with significant costs because they’re such sizeable loans. While there’s no way to avoid all of the costs associated with a mortgage, there are ways to save on your home mortgage. Here are three things you can do to reduce what you pay over the course of the loan.
Private mortgage insurance (PMI) is an insurance policy that generally protects lenders in the event of a default. If there’s PMI on your mortgage and you fail to pay the loan back, the insurance will reimburse the bank for their outstanding liability.
When this insurance is required, the homeowner pays the insurance’s premiums even though the insurance protects the bank (and not the homeowner). This is because the insurance protection is for a risk that’s directly related to the homeowner.
Whatever premiums you pay for PMI is money that you’ll never see again. The premiums aren’t applied to your mortgage balance (even though they’re sent in with your mortgage payment), and you personally will never collect on the protection.
Thus, you should avoid PMI if at all possible. The best way to avoid the insurance and corresponding premiums is to make a sizeable downpayment at closing. In most cases, banks require homebuyers who put less than 20 percent down to purchase PMI. If you put at least 20 percent down, you probably won’t need to pay for the insurance.
Points are an option that you can purchase at closing. In exchange for buying a point, a bank will deduct the interest rate on your mortgage slightly. Usually, one point costs $1,000 for every $100,000 borrowed and lowers the interest rate by 1 percent.
Purchasing points at closing will cost you more up front, but they’ll drastically reduce how much interest you pay over the course of your mortgage. During a 15- or 30-year span, even a small reduction in interest yields a sizeable savings.
Of course, paying off your mortgage early is a guaranteed way to save. You’ll no longer pay interest once your mortgage is paid off, and you’ll also have a big improvement in your month-to-month cash flow.