Five Simple Ways You Can Save Money on Your Next Mortgage
When adding real estate to your investment portfolio, a mortgage is a sizable investment. Regardless of the home’s sale price, you’ll likely need to spend thousands of dollars, or more, on a down payment. If you want to save money on your next mortgage, it’s highly recommended that you take the down payment, loan term length, interest rate, and sale price into account. Here are five easy ways that you can reduce the amount you spend on your next mortgage.
Make Improvements to Your Credit Score
One of the simplest methods you can use to reduce the amount you spend on a mortgage is to improve your credit score. A higher credit score usually results in a lower interest rate on your mortgage loan. Lenders view your credit score as a key indicator on your ability to repay the loan.
If your score is relatively low, you may receive a higher interest rate to offset the lender’s increased risk. Some steps you can take to improve your credit score include:
- Reduce the outstanding balances on your credit cards.
- Make all of your debt payments on schedule.
- Don’t apply for additional credit until you’ve closed on the mortgage. Any additional credit inquiries will likely lower your score by several points.
- Place your monthly bills on your credit report to build a strong credit history.
- Review your credit report to look for inaccuracies, which you can then dispute.
Increase Down Payment
Increasing your initial down payment is also an easy way to reduce your monthly mortgage payment. While a down payment of 20% has long been the recommended amount, such a high down payment can make it difficult to afford a home. If you want to buy a home worth $300,000, your down payment would need to be $60,000 to reach the 20% threshold.
If, however, you’re able to afford a 20% down payment, your monthly mortgage payment should be relatively low. You’ll also benefit from a lower interest rate as well as the ability to avoid paying for private mortgage insurance (PMI).
Select a Lengthier Mortgage Term
Another option available to you is to choose a lengthier mortgage term. Your monthly mortgage payment will invariably be lower if you pay off your mortgage for 30 years as opposed to 15 years.
Let’s say that you’re buying a $300,000 home with a 10% down payment and a 5% interest rate. If you have a 15-year mortgage, it’s likely that your monthly mortgage payment would be nearly $2,600. Switching to a 30-year term reduces your monthly payment to just over $1,900.
Keep in mind, however, that you’ll end up paying more in the long run because of higher interest. The total interest you pay on a long-term loan is around $137,000 more when compared to the 15-year term.
Negotiate Closing Costs
In most cases, closing costs add around 2-5% to the purchase price for your home. These costs cover:
- Home inspection fee
- Appraisal fee
- Loan origination fee
- Title fees
- Attorney fees
While these costs can be high, you may be able to save money through negotiations. Speak with your lender or the seller’s real estate agent to explore your options. For instance, the seller may be willing to cover a portion of the closing costs. If the home requires some notable repairs, you could have more power during negotiations.
Purchase a More Affordable Home
You can also save money on a mortgage by purchasing a more affordable home. Since the Federal Reserve lowered interest rates in 2020, home values have risen rapidly as a result of high buyer demand. While interest rates have since increased, buyer demand remains high.
If your dream home is too expensive, look for one that fits within your budget and allows you to make a monthly payment you can actually afford. You could also search in different neighborhoods where prices are more in line with your expectations. Another option is to relocate to a state or area with lower property taxes.
Regardless of the quality or size of the home you’re interested in, you’ll be making a large investment by obtaining a mortgage. You can save on your next mortgage by taking steps like improving your credit score and buying a more affordable home.