Buying a home is one of the most significant financial decisions you’ll ever make.
With the average American spending nearly 30 years for paying off their mortgage [a state where you are in an agreement with your banker or lender, where that lender or banker has the authority to take away your property, if you fail to repay the amount borrowed plus the interest on it], it becomes extremely important to have a well-thought-out plan that will help you save money and minimize the overall cost of homeownership.
Saving money on your mortgage can also support you to increased financial security, reduced stress,and the ability to allocate funds towards other important financial goals.
In this blog post, you will find 11 simple tips that will help you save money on your mortgage and make the most of your investment.
Tips To Save Money On Your Mortgage
1. Choose the right mortgage option
The foremost important decisions you’ll need to make while shopping for a mortgage is whether to choose a fixed-rate or adjustable-rate mortgage.
Fixed-rate mortgages have an interest rate that will remain constant throughout the life-time of the loan, while adjustable-rate mortgages (ARMs) will have an interest rate that can change over a period of time.
Fixed-rate mortgages offers stability and predictability, making it easier to budget and plan for the future. However, they often have higher initial interest rates than ARMs.
On the other hand, ARMs typically offer lower initial interest rates, but they carry a risk that the rate of interest would increases over a period of time, which can lead to higher monthly payments.
It’s essential to consider your long-term financial goals when selecting the right mortgage option.
If you are planning to stay in your home for many years and value the stability of fixed monthly payments, a fixed-rate mortgage would be the best choice.
However, if you are anticipating on moving or refinancing within a few years, then an ARM could potentially save you money.
2. Improve your credit score
Your credit score is an important element for determining the interest rate you’ll receive on your mortgage.
The higher your credit score the more likely you are to qualify for a lower interest rate, which can help you save thousands of dollars over the life time of your loan.
For improving your credit score it is recommended to focus on paying all your bills on time, reducing your overall debt, keeping your credit utilization low, and avoid applying for new credit unless necessary.
Regularly reviewing your credit report for errors and disputing inaccuracies can also help boost your score.
By improving your credit score, you can potentially qualify for a lower mortgage interest rate, which will lead to a reducing monthly payment as well as the total amount you’ll pay as interest over the life of the loan.
3. Save for a larger down payment
A larger down payment can help you secure a lower interest rate, which will ultimately reduce the amount you need to borrow, and potentially eliminate the need for private mortgage insurance (PMI), which is typically required when your down payment is less than 20% of the home’s purchase price.
To save for a larger down payment, consider cutting discretionary expenses [which are the non-essential expenses that occur in the business or at household], setting up automatic savings transfers, and exploring down payment assistance programs.
You can also use windfalls like bonuses, tax refunds, or inheritances to boost your down payment savings.
By putting down at least 20% of your home’s purchase price, you can avoid PMI, potentially saving you hundreds of dollars per year.
4. Shop around for the best mortgage rates
Mortgage rates can vary significantly between lenders, so it’s essential to shop around and compare the different rate of interest provided by different lenders to ensure you’re getting the best deal possible.
Even a small difference in the interest rates can translate to significant savings over the life of your loan.
You can utilize online resources and tools, such as comparison websites and mortgage calculators, to gather and compare rate quotes from multiple lenders.
This would help you identify the most competitive offers and make an informed decision.
As you’ve gathered the best quotes from multiple lenders, don’t be afraid to negotiate with them.
Let lenders know you’re shopping around and ask if they can match or beat their competitors’ rates.
Through this, you will be able to secure a better deal by leveraging the competitive nature of the mortgage industry.
5. Get pre-approved for a mortgage
If you are able to pre-approved for a mortgage then it can provide you with a better understanding of how much you can afford, streamline the mortgage application process, and give you a competitive edge while making an offer on a home.
Sellers often prefer pre-approved buyers, as it demonstrates financial readiness and reduces the probability of a deal falling due because of financing issues.
With a pre-approval in hand, you can expedite the mortgage process once you find the right home, potentially enabling you to close more quickly and avoid potential rate increases.
A pre-approval can also give you more negotiating power while making an offer on a home, as it signals to sellers that you are a serious and financially qualified buyer.
6. Opt for a shorter loan term
Mortgage loans are typically available in 15-year and 30-year terms.
While a 30-year mortgage often results in lower monthly payments, a 15-year mortgage typically offers lower interest rates and allows you to build equity more quickly.
Choosing a shorter loan term can save you tens of thousands of dollars as interest over the life of the loan.
Moreover, it allows you to pay off your mortgage faster and own your home outright sooner.
While deciding between a short or long term loan, consider your budget and financial goals. As a short term loans may result in higher monthly payments, so ensure you can comfortably afford them before committing to this option.
7. Make biweekly payments
By making biweekly mortgage payments instead of monthly payments, you can effectively make one extra payment per year, which can help you pay off your mortgage faster and save on interest.
Biweekly payments divide your monthly payment in half and pay that amount every two weeks.
Over the course of a year, this results in 26 half-payments or the equivalent of 13 full payments, rather than the 12 payments you’d make with a monthly payment schedule.
You can contact your mortgage lender to inquire about setting up a biweekly payment plan. Some lenders may charge a fee for this service, so be sure to weigh the potential savings against any associated costs.
8. Refinance your mortgage
Refinancing your mortgage can potentially help you in saving money if you’re able to secure a lower interest rate or switch from an adjustable-rate mortgage to a fixed-rate mortgage.
It may also be a viable option if you want to shorten your loan term or access your home equity for other financial goals.
Refinancing your mortgage typically involves closing costs, which can range from 2% to 5% of the loan amount.
Further, refinancing may extend your loan term, potentially nullifying some of the interest savings. Be sure to carefully consider the costs and potential benefits of refinancing before moving forward with the process.
Like with your initial mortgage, it’s important to shop around and compare refinancing offers from multiple lenders as well.
Review the interest rates, loan terms, and closing costs associated with each offer to determine which option best aligns with your financial goals and needs.
9. Make extra payments
Making extra payments toward your mortgage principal can help you pay off your loan faster and save on interest. Even small additional payments can have a significant impact over the life of the loan.
It would be helpful if you consider allocating windfalls, such as bonuses or tax refunds, toward your mortgage principal.
Also, you can make one extra payment per year or add a small amount to each monthly payment to gradually chip away at your mortgage balance.
When making extra payments, make sure to specify that the additional funds should be applied to your mortgage principal.
This will ensure that the extra payments are directly reducing your loan balance, rather than simply prepaying interest.
10. Utilize tax deductions and credits
Certain mortgage-related expenses, such as mortgage interest and property taxes, may be tax-deductible, which can help offset the cost of homeownership.
There may be some tax credits available for first-time homebuyers or those who invest in energy-efficient home improvements.
Keep a detailed records of your mortgage-related expenses, including interest payments, property taxes, and any eligible home improvements.
This documentation will be necessary while paying your taxes and claiming any applicable deductions or credits.
It would be helpful if you consulting a tax professional to ensure you’re taking full advantage of any mortgage-related deductions and credits for which you’re eligible.
A tax professional can help you navigate the complexities of the tax code and maximize your savings.
11. Consider a mortgage offset account
A mortgage offset account is a separate savings or checking account linked to your mortgage. The balance in this account is used to offset the principal balance of your mortgage, effectively reducing the interest you owe.
Mortgage offset accounts can help you save on interest and potentially pay off your mortgage faster. However, not all lenders offer this option, and there may be fees associated with maintaining an offset account.
Moreover, the funds in the account may not earn interest which could offset some of the potential savings.
If you’re interested in opening a mortgage offset account you need to research your lender’s offerings and compare them to other available options.
You should consider any associated fees and potential interest savings to determine if an offset account is the right choice for your financial situation.
So the above were the best tips for you to save money on your mortgage.
I hope you found this article useful.