When we bought our first house in 2012, I just accepted whatever mortgage terms the lender offered. Fixed rate, 30 years, here’s your payment, sign here. I didn’t understand that small decisions at signing would cost us tens of thousands of dollars over the life of the loan, money that could have been college savings or retirement contributions or literally anything other than interest payments to a bank.
We refinanced in 2020 and I finally paid attention. The difference between understanding loan costs and just signing paperwork was about $47,000 over the remaining loan term.
Here’s how to actually reduce what you pay in total on any loan.
The Biggest Factor: Interest Rate
Your interest rate determines more than any other single factor how much you’ll pay over the life of a loan. On a $300,000 mortgage over 30 years, the difference between 6% and 7% interest is about $72,000 in total payments. One percentage point. Seventy-two thousand dollars.
Getting a lower rate matters more than almost anything else you can do.
Shop multiple lenders. Rates vary significantly between lenders on the same day for the same borrower. Get quotes from at least three to five lenders, banks, credit unions, and online lenders all included. Don’t assume your current bank offers the best deal.
Improve your credit score before applying. The best rates go to borrowers with scores above 760. Every tier below that costs more. If your score is 680 and you have six months to spare, paying down credit cards and fixing any errors on your report could save you tens of thousands over the loan term.
Consider paying points. Discount points let you buy a lower interest rate, typically costing 1% of the loan amount to reduce the rate by 0.25%. This makes sense if you’ll keep the loan long enough to recoup the upfront cost through lower monthly payments. The math varies by situation.
Lock at the right time. Rates fluctuate daily. Once you have a rate you’re comfortable with, lock it. A rate lock protects you if rates rise before closing. Waiting and hoping for rates to drop is gambling.
Choose a Shorter Loan Term
A 15-year mortgage has higher monthly payments than a 30-year mortgage but dramatically lower total interest paid, often less than half as much. You also typically get a lower interest rate on shorter terms.
Example on a $300,000 loan: a 30-year term at 7% means monthly payments of about $1,996 and total interest of roughly $418,000. A 15-year term at 6.5% means monthly payments of about $2,613 but total interest of only about $170,000. You pay $617 more per month but save nearly $250,000 over the life of the loan.
The same principle applies to car loans, personal loans, and any other debt. Shorter terms mean higher payments but less total cost.
If you can afford the higher payment, a shorter term almost always makes financial sense. If you can’t comfortably afford it, the longer term with a plan to pay extra when possible is the safer choice.
Make Extra Principal Payments
Even if you have a 30-year mortgage, you can pay it off faster by making extra payments that go directly toward principal. Every dollar you pay beyond the minimum reduces your balance and the interest you’ll pay over time.
Pay biweekly instead of monthly. Split your monthly payment in half and pay every two weeks. You end up making 26 half-payments per year, equivalent to 13 monthly payments instead of 12. That one extra payment per year can shave years off your loan and save thousands in interest.
Round up your payment. If your payment is $1,847, pay $1,900 or $2,000. The extra goes to principal and adds up over time.
Make one extra payment per year. Use a tax refund, bonus, or side income to make a 13th payment directly to principal. Even one extra payment annually takes years off a typical mortgage.
Specify that extra goes to principal. When making extra payments, confirm with your lender that the money applies to principal, not to next month’s payment or to an escrow account. Some lenders require you to note this explicitly.
Do the math first. Use a loan amortization calculator to see exactly how much extra payments save. The numbers are motivating, especially early in the loan when most of your payment goes to interest rather than principal.
Refinance When Rates Drop
If interest rates drop significantly below your current rate, refinancing can save substantial money, but only if the math works out.
The old rule of thumb said refinance if you can lower your rate by 1% or more. That’s too simple. What actually matters is whether your savings exceed your costs within the time you’ll keep the loan.
Refinancing costs money, typically 2-5% of the loan amount in closing costs. If refinancing a $250,000 balance costs $7,500 in fees and saves you $200 per month, you break even in about 38 months. If you’ll stay in the house longer than that, refinancing makes sense. If you’ll move in two years, it doesn’t.
Calculate your break-even point. Divide your closing costs by your monthly savings. That’s how many months until refinancing pays off. If you’ll keep the loan that long, proceed.
Consider a shorter term when refinancing. If you’re 10 years into a 30-year mortgage and refinance to a new 30-year loan, you’ve added 10 years of payments. Refinance to a 20-year or 15-year term to avoid extending your debt.
Don’t restart the clock unnecessarily. A lower rate on a new 30-year term might reduce your payment but increase your total cost if you’re already years into your current loan. Run the total cost comparison, not just the monthly payment.
Avoid Fees and Add-Ons
Lenders make money beyond interest through fees and optional products that add to your loan cost.
Origination fees are negotiable. Some lenders charge 1% of the loan amount, some charge less, some charge nothing but have slightly higher rates. Compare the total cost, not just the fee or just the rate.
Application and processing fees vary widely. Ask for a complete fee breakdown before committing to any lender.
Private mortgage insurance (PMI) is required if your down payment is less than 20% on a conventional mortgage. It protects the lender, not you, and adds to your monthly cost. Options: save for a larger down payment, use a piggyback loan to avoid PMI, or choose a lender-paid PMI option (which typically means a slightly higher rate). Once you have 20% equity, request PMI removal.
Extended warranties and insurance products are frequently pushed on car loans. Gap insurance has legitimate value for some buyers, but most add-ons are expensive for what they cover. Decline unless you’ve independently verified you need it.
Prepayment penalties are rare now but still exist in some loans. These fees punish you for paying off the loan early, which eliminates your ability to refinance or pay extra without penalty. Avoid loans with prepayment penalties unless you have no other option.
Make a Larger Down Payment
More money down means a smaller loan, which means less interest paid over time. On a home purchase, 20% down also eliminates PMI, reducing your effective interest rate further.
Example: On a $400,000 home, putting 10% down ($40,000) means financing $360,000. Putting 20% down ($80,000) means financing $320,000. Over 30 years at 7%, that $40,000 difference in down payment saves about $56,000 in interest, more than the extra down payment itself. Plus you avoid PMI.
The same logic applies to car loans. A larger down payment means a smaller loan means less interest. Trade-in value, if you have a car to trade, acts as part of your down payment.
Automate Payments
This doesn’t reduce your total loan cost directly, but some lenders offer rate discounts for autopay enrollment, typically 0.25% to 0.50% off your rate. Over a long loan term, that small discount adds up.
Autopay also eliminates late payment risk, which matters because late payments can trigger penalty rates on some loans and damage your credit score, making future borrowing more expensive.
The Student Loan Specific Version
Student loans have their own cost-reduction strategies worth mentioning.
Income-driven repayment plans reduce monthly payments but extend the term and increase total cost. They help if you can’t afford standard payments, but paying more than required when possible saves money long-term.
Employer repayment assistance is increasingly common as a benefit. If your employer offers it, take it.
Public Service Loan Forgiveness eliminates remaining balances after 10 years of qualifying payments for borrowers in government and nonprofit jobs. If you qualify, optimize for this rather than paying extra.
Refinancing private loans at lower rates makes sense when rates drop, but think carefully before refinancing federal loans because you lose access to income-driven repayment, forgiveness programs, and federal forbearance protections.
What Matters Most
If you take one thing from this: your interest rate matters more than almost anything else, and the way to get a better rate is to shop aggressively, improve your credit before applying, and be willing to negotiate.
The second most impactful thing is paying extra toward principal whenever you can, because every extra dollar saves you the interest that dollar would have generated over the remaining loan term.
Everything else helps, but those two things are the big levers.
This post is for informational purposes only and is not financial advice. Consult with a qualified financial advisor for decisions about your specific situation.
