Looking at your mortgage bill and seeing the remaining balance can be tough. Equally hard to swallow is the number of years you'll be tied down to your home loan.
It's a burden that almost everyone goes through. Fortunately, there are some tricks to help you save on your mortgage and trim years off the duration of the loan.
For example, Shashank Shekhar, CEO of Arcus Lending and author of, "First Time Home Buying 101," recommends adding any extra income towards your mortgage.
"A lot of people get a one-time or a two-time bonus," says Shekhar. "I tell my clients to forget that they get a bonus and to use it each time to make a lump sum payment towards their principal; just work with your regular salary that you get and think that your bonus doesn't even exist."
Read on for additional advice from mortgage experts…
Tip #1 - Maximize Your Tax Refund this Year and Put it Towards Your Mortgage
With the tax refund season well underway, this tip is especially relevant.
"Instead of blowing your income tax money on toys and dinners, use it to pay down your balance faster," advises Carolyn Warren, author of the best-selling book, "Mortgage Rip-Offs and Money Savers.".
And although not everyone gets a refund, the Internal Revenue Service (IRS) says that about three out of four filers usually get one, according to their website.
What's more, the IRS reports that in 2013, American taxpayers received an average income tax refund of $2,755. That's a nice chunk of change. And even if someone doesn't put it all toward their mortgage, it could still make a huge difference in helping them pay it off faster.
"For instance, let's say you pay an extra $1000 each year, you could take off as much as six or seven years off your mortgage and also lower your interest rate in the process," Warren explains.
If you can't pay an extra $1000 each year, you could still trim some years off your mortgage with a smaller amount, she adds.
Tip #2 - Be Aggressive During the First Five Years
"The first years of your mortgage, payments heavily go toward interest, so by paying sooner, you get to the point where more of your payment goes toward your own principal balance," explains Warren. "How mortgages work is that it looks like an upside-down pyramid if you're drawing out how much of your payment goes towards interest and how much towards principal balance."
As a result, the faster you start paying down your principal, the closer you get to paying off your mortgage, says Warren.
"So if you can put some extra money on your balance in those first five years, it's tremendously helpful," she adds.
Warren says one of the ways this can be accomplished is by paying an extra $100 or $200 on your mortgage each month right from the start. If you view it from a yearly basis, an extra payment of $100 each month equals an extra $1200 on your mortgage at the end of the year, and an extra payment of $200 comes to $2400 annually. That extra money makes a considerable difference from year to year and could help you start paying down your principal much faster, she says.
If you're unable to pay the extra $100 or $200 on a monthly basis, use whatever extra money you might have available "because every little bit helps," says Warren.
Tip #3 - When Refinancing, Don't Forget about the 20-Year Loan
Refinancing to a shorter-term loan is another smart option for homeowners who want to pay off their mortgage faster, says Shekhar.
"It's pretty standard for everyone to get into a 30-year fixed loan, which is fine if you're a first-time homebuyer, and I understand you want to keep your payments low in the 30-year fix," says Shekhar. "But after some time, when you become a little more comfortable with your finances, you should definitely consider a 15 or 20-year fix."
Shekhar provides an example of how much a California homeowner could save in interest costs by moving from a 30-year fixed loan to a 15-year fixed:
"In California, the average interest rates are around 4.375 percent on a 30-year fixed loan versus 3.375 percent on a 15-year fixed for a high balance conforming loan," he explains. "For a loan in the amount of $600,000, you save $313,000 in interest cost with a 15-year fixed mortgage compared to a 30-year fixed. So you save over $300,000 over the life of the loan. That's super huge."
Of course, Shekhar points out that $600,000 is higher than the average home prices in the United States, but asserts that even on an average-priced home, you still could save tens of thousands of dollars by switching to a shorter-term loan plan.
"It's not just that you pay your loan faster, but it's surprising how much money you can save as well," he says.
And while you may not hear about 20-year loans as often as you may a 15-year loan, it's definitely a viable option to consider, especially if the payments on a 15-year term don't seen manageable.
"If you can't afford the payment on the 15-year loan, you might be able to afford the payment on the 20-year," says Warren.
Tip #4 - Tell Your Lender You Want Extra Payments to be Applied Immediately
If you’re putting in the effort to make extra payments towards your mortgage, make sure you’re getting the biggest bang for your buck.
In order to do so, it’s imperative that you tell your lender exactly how you want the extra funds to be applied to your mortgage. For the biggest savings, tell your lender to apply the extra payments towards your principal - immediately.
Otherwise, your lender may simply hold on to the extra payment and apply it during your next scheduled payment. Remember, your interest accrues daily, so even if the funds are sitting idle for just a couple of days, you could be missing out on big savings.
Tip #5 - Consider if Tapping Your 401K is Worth it
This option isn’t right for everyone, so you’ll need to carefully assess which option will give you the biggest return: Investing in your 401K or paying down your mortgage?
The answer will depend on a variety of factors, including:
Higher Return on Investment: Think about what your current mortgage interest rate is and how much time is remaining, and compare that with your 401K investments. Which has the higher return? If you have a rock-bottom interest rate in the 2s or 3s, it may not be worth tapping into your investments that are yielding high profits.
Taxes: When you take money out of your 401K, the amount is considered taxable income. This means that if you take out a significant amount to pay down your mortgage, you may move up a tax bracket or two.
As you can see, there's a lot to consider when making this decision, so it's best to consult with your lender and financial adviser to see which option is most beneficial for your future.