5 Ways You Can Save Money on Your Mortgage
Since mortgage loan interest rates began to climb a couple of years ago, homebuyers around the country have been looking for more ways to save. Saving money on your mortgage starts with choosing the right personal lender.
A client-oriented lender will help you take advantage of any available programs that can save you money, such as first-time homebuyer programs. They will also help you choose the right type of mortgage loan based on your unique financial situation.
That said, you still need to do your part to maximize your savings. You can do that by:
In order to save money in the long term, many borrowers buy points. Mortgage points are upfront fees paid to your lender to reduce your loan’s interest rate.
The cost of a point and the amount that each point lowers your interest rate will vary based on market conditions. The amount you are borrowing will also influence the cost of your points.
Buying points will drop your interest rate anywhere from one-eighth to one-quarter of a percent. Lenders put limits on how many points you can buy and usually won’t let you drop your rate by more than one percent.
Buying down your rate by a single percentage point could cost thousands of dollars upfront, but your lender will explain how much it will save you in the long run. If you like, you could also ask the seller to pay for a rate buydown as part of the contract terms.
Making a Bigger Down Payment
Making a bigger down payment will result in a lower monthly mortgage payment. Not only will you be paying less in principal and interest, but you may also be able to avoid private mortgage insurance (PMI). PMI protects the lender in the event you default on your loan.
Lenders require you to have PMI if you finance more than 80% of a home’s appraised value. For instance, if you buy a home for $300,000 and your down payment is $30,000 (or 10%), you’ll need to finance $270,000 of the purchase price (90% of the home’s value). In this case, you will need PMI. But if you are able to add an additional $30,000 to your down payment, you will avoid needing to purchase PMI.
Your PMI is added to your monthly mortgage payment. Since PMI varies based on your credit score and original loan amount, this fee can easily increase your mortgage payment by a few hundred dollars per month.
Filing for a Homestead Exemption
Most states allow you to file a homestead exemption on a home if you are using it as your primary dwelling. This exemption lets your state know that you intend to live there full-time and are not using the property as a rental.
If you are granted a homestead exemption, you will receive a discount on your annual property taxes. You can choose to pay your taxes yourself before the deadline set by your state, or they can be paid using an escrow account that is set up when you close on your home.
Lowering your property taxes reduces the amount of money you have to pay each month to replenish the escrow, meaning your mortgage payment will also drop.
Shopping Around for Homeowner’s Insurance
Like your property taxes, your homeowner’s insurance is also most often paid out of an escrow account. You have to front the money for the first year of your homeowner’s insurance policy when you close on your home. Then, throughout the year, your loan servicer will take a portion of each mortgage payment and deposit it back into the escrow account to pay for your next homeowner’s insurance premium.
If your homeowner’s insurance goes up, your lender will require you to pay more each month to cover the difference. However, you can offset rising insurance costs by shopping around for a better deal. Switching insurers can save you hundreds each year, which will reduce your monthly mortgage payment, too.
If you have already bought a home and are unhappy with your current mortgage rate, you may be able to save money by refinancing. Consider how refinancing will change your interest rate, and remember that you will incur thousands in additional closing costs, which will be added to your total loan balance. By refinancing an existing loan, your total finance charges may be higher over the life of the loan, so you should check with your personal lender to see if it is the right choice for you.
Even if loan rates are higher than when you bought your home, consider that refinancing may help you drop mortgage insurance if you originally had an FHA loan. Under FHA terms, you continue paying mortgage insurance even if you own more than 80% of your home’s value. To drop this fee, you can refinance to a new loan.
If you can get a lower interest rate and drop mortgage insurance at the same time, refinancing is the ticket to help you save hundreds on your monthly mortgage payment.
Categories: Home Buying