Homeowners can easily get into a comfortable groove year after year: make monthly mortgage payments, auto-renew homeowner’s insurance, and put off upgrading to more efficient technology (such as appliances and lighting), among other things. But that groove can cost you money.
Making the minimum loan payments (while putting extra money in a low interest-bearing savings account) or keeping the same policy for years (without shopping around for more competitive rates) is an easy way to save less and spend more than you should.
The new decade is the perfect time to ditch those old moves and learn some easy, new steps that can get you closer to your financial goals in 2020.
Check out these homeowner resolutions to make a big change in your wallet.
Resolution 1: Pay down principal if it makes sense
Basic economics dictate that borrowers should pay off their debts with the highest interest rates first. Since mortgages today generally have low interest rates, folks with more expensive debt should tackle those big-ticket loans (like credit cards) first and then hit their mortgage.
However, if you have private mortgage insurance, or PMI, you’ll want to pay down your balance as quickly as possible to the 80 percent equity level to eliminate that monthly PMI payment.
“Even though interest rates are at near-historic lows, pre-pay your mortgage, especially if you did a low-down-payment loan and had to take private mortgage insurance (PMI),” says Ilyce Glink, author of “100 Questions Every First-Time Home Buyer Should Ask.” “PMI is expensive, so paying down principal enough to either refinance your way out of PMI or where the bank can effectively cancel it for you will make your monthly payment significantly smaller.”
When you make extra payments toward your principal, make sure your lender knows this money should go toward your principal, otherwise they might apply it to your next month’s mortgage payment.
Some lenders have options to earmark extra funds in their payment system. If you’re unsure, check with them on how you should proceed.
Ways to prepay your mortgage:
- Apply a lump sum amount to your principal balance.
- Make extra mortgage payments every year.
- Add more money (above the minimum amount) to each payment and earmark those dollars for the principal.
- A mixture of any of these things.
Resolution 2: Refinance your mortgage for a better rate
If you have an interest rate north of 4 or 5 percent and aren’t going to sell anytime soon, experts recommend considering a refinance.
“If a homeowner plans to be in their current home for a long period of time, thinking through ways to reduce their monthly mortgage payment through refinancing into better loan terms for them personally, is a great way to approach the new year,” says Dr. Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors.
There are still millions of homeowners who will likely benefit from refinancing their mortgage and locking in a lower rate.
But, before you refinance, make sure the savings outweigh the cost. Borrowers have to pay closing costs, which can range from 2 to 4 percent of the home’s value. Over time, you’ll recoup that money in savings, but many experts recommend avoiding refinances that require more than 18 months to recover the closing costs. You can use Bankrate’s mortgage refinance calculator to crunch the numbers and see if this move can benefit you.
Resolution 3: Shop around for better insurance rates
Although homeowners can’t avoid property insurance, they can avoid paying more than they need to. In fact, if you want to maximize your savings, you might want to shop around for insurance on an annual basis, some experts suggest.
“In the new year, homeowners should at least shop around for new policies to see if they can get a better rate,” says Bill Martin, CEO at Plymouth Rock Home Insurance. “They could also benefit from taking a look at what is covered in their current plan and determining what they need or don’t need covered.”
Being underinsured can be just as costly or more as paying too much for insurance.
A survey by United Policyholders, a consumer advocacy group, showed that 75 percent of California homeowners, who were affected by the 2007 San Bernardino and Riverside county wildfires, were underinsured by an average of $240,000.
Resolution 4: Make your home energy efficient
Homeowners can save money immediately by making energy-efficient tweaks to everything from lighting and windows to solar panels. According to the Department of Energy “widespread use of LED lighting has the greatest potential impact on energy savings in the United States.”
Homeowners don’t have to invest thousands of dollars to save money, they can start small by upgrading appliances, installing programmable thermostats or even using smart strips for all electronic devices, recommends Alina Trigub, managing partner at SAMO Financial.
“Smart strips stop the power from flowing to the devices not being currently in use,” Trigub says.
Resolution 5: Don’t neglect small repairs
Leaves gathering around gutters might seem inconsequential but if they’re neglected long enough, they can lead to major damage, says David Reiling, CEO at Sunrise Banks.
In fact, minor problems should be taken care of immediately to save big costs down the road. To save money, Reiling recommends saving now for those little repairs and doing the work yourself while it’s still manageable.
“House projects are pricey and, depending on what you’re having done, can cost you upwards of $10,000 or more. A new roof isn’t cheap. To dampen the financial burden, do two things: save as much as you can and don’t outsource work when you don’t need to,” Reiling says.
Compare savings accounts and find one that has a high return. Dedicate this account to your house repairs fund. This will help you avoid using credit when problems arise.
“By just putting a small amount away each paycheck you can surprise yourself with the extra cash you’ll accumulate,” Reiling says. “Be diligent about it, and track your progress. Online savings accounts can yield higher returns than traditional ones, too, sometimes to the tune of a 1 to 2 percent APY increase.”
- Everything you need to know to refinance your mortgage
- Cash-out refinancing: How it works and when it’s the right option
- The 3 most important requirements to borrow from home equity