Your mortgage will, in most cases, be your most expensive monthly bill. Every dollar that you can shave off of your monthly payment will pay huge dividends. After all, you will be making those payments for up to thirty years.
There may not be one big area where you can make a reduction in your payment but a bunch of little savings can add up in a big way. Here are some areas to look at when you want to save on that new mortgage.
1. Increase Your Down Payment
This is probably the biggest way to save money on your mortgage and that is for a few reasons. For starters, every dollar that you put down is money that you will not be paying interest on. This is a long term loan so that is a lot of interest that would accumulate.
In addition, the amount that you pay down will determine how much mortgage insurance you pay or if you even pay it at all.
For example, if you put down 20%, you will pay zero mortgage insurance, nada, zero zilch. That will save you a considerable amount of money, 200 dollars a month on an average mortgage, maybe more on yours.
If you are going with a standard 30 year fixed FHA loan, you re required to put 3.5% down. With that down payment, you will pay a .85 percent annual mortgage insurance payment for the life of the loan. If you bump your down payment up to 5%, you can drop that mortgage insurance rate to .8 percent for the life of the loan. Not a huge decrease but on a $300,000 dollar house that will save you $150 a year.
Here is the real savings. Increase the down payment yet again to 10% down and you will still pay .8% mortgage insurance but it will automatically drop after 11 years. Without that down payment increase, you would have had to refinance your loan to get rid of mortgage insurance.
2. Purchase Points From Your Lender
Purchasing points is typically not a good idea unless you intend to stay in your home for a long time. It you mover every 2 to 3 years, it is probably not going to be a good idea to purchase them.
The typical rate of a point is 1% of the purchase price of the house. So for a $300,000 home, you would pay $3,000 for a single point. In return for that price, you would get .25 percent off of your interest rate. So, if you had a mortgage rate of 4.5% on a $300,000 home, you would pay the lender $3,000 and your rate would then become 4.25%.
To see if it is worth the money you would have to do the calculations and compare that to how long you reasonably expect to be in a home. For that $300,000 home on a 30 year fixed mortgage, 1 point would save you $44 a month. With that savings, you would break even after your 69th payment. That is 5.75 years. If you plan to be in the house longer than that, it makes sense to buy that point.
3. Improve Your Credit Score
This is something that needs to be done months in advance but it makes a big difference. We just demonstrated above that a .25 percent reduction in interest can save you $4 a month. Improving your credit could get you a better rate without you having to resort to buying points. Here are the best ways to improve your credit.
Lower Your Credit Utilization
About a third of your score is based on this. A good range to shoot for is below 30%. So, just for the sake of example, if you had 1000 dollars in credit available, you would want to keep your balance under 300 dollars. This will help you get a very good score. If you want to take it a step further, the best range to be in is 0% to 10% with a ratio of 1% actually being the magic number.
Get those balances down several months before you apply for your mortgage so that your balances have time to be updated on your credit report.
Pay Your Bills On Time
On time bill payments are another huge part of of your credit score. Just one late payment can give you a very bad credit score and will keep affecting it for a long time. If a mortgage is in your future, pay your bills religiously. Use automatic payments and bill reminders to help you get the job done.
Other Things You Can Do
The two factors above will make the biggest impact but there are some little things you can do. Avoid opening new accounts and do not get any hard inquiries until the mortgage is done. Also, do not close any accounts. Closing an account can lower your average account age, could make your types of credit less diverse or lower your available credit. All things that could hurt your score.
4. Get An ARM
The last thing that you might think you should do is get an Adjustable Rate Mortgage, but it might just work for you.
Adjustable Rate Mortgages got a bad wrap during the last housing crisis but they can be a good loan if you do not plan on being in your home for long. If you have a history of selling your house every 2 to 3 years, it is probably a smart choice.
ARM’s will generally have a lower interest rate than a fixed rate mortgage and the rate will not change until the first term of the loan expires in five years. So, if you plan on being out of the house by then, the rate change will not affect you. If things change and you end up in the house longer, simply refinance the loan and get a fixed rate mortgage.