How To Save Money On Your Home Loan

How to Save Money on Your Home Loan

Owning a home is considered a rite of passage and a deep-rooted symbol of prosperity and success. Unfortunately, it is also a significant lifetime investment. Use the tips below to save thousands of dollars on your home loan before, during, and after the purchase.

Before You Buy a Home:

Pay your bills on time and pay attention to your credit report: The best interest rates are given to people with excellent credit scores, typically over 700. Do you know that just a 0.5% reduction in the interest rate can save you thousands of dollars over the life of the loan? Many lenders are willing to educate you on key factors, such as your debt-to-credit ratio, and help you take action to improve them.

Only apply for a loan you can afford: Shop for a home you can reasonably afford, especially under extreme circumstances such as job loss or health disasters. Don’t be afraid to negotiate a lower price on your dream home. Keep in mind your long-term goals as well. Sometimes people are better off purchasing a smaller home, gaining equity, and transitioning into a larger residence, rather than jumping right into an expensive home.

Conduct research for the best deal: Look for the lowest interest rates, minimal fees, no prepayment penalties, and even rewards programs for on-time payments. Check with local banks and credit unions as well as national banks and online lenders. The credit reporting agencies allow a 30-day period for mortgage comparison shopping, so don’t be afraid that such activities will negatively impact your credit history.

Avoid jumbo loans: These loans are originated for properties exceeding the Fannie Mae and Freddie Mac limits, currently $729,750 for high-cost areas and $417,000 for other areas. Since jumbo loans carry a greater level of risk for the lenders, they come with a higher interest rate and a higher price tag.

As You Are Signing the Paperwork:

Pay points upfront to reduce the loan balance: Each point represents one percent of the loan, and paying one or two points is common. Not only will this method decrease the total interest paid over the life of the loan, but it will also garner you a better rate, which further reduces your costs.

Make a larger down payment: Paying more money upfront means paying less money over the coming years. Even better, down payments over 20% eliminate the need for private mortgage insurance, which is tacked on to most borrowers’ monthly bills. Even if you cannot afford 20% down now, you can ask your lender to remove the private mortgage insurance charge later, once your home accumulates enough equity.

Shorten the loan term: For example, choose a 15-year mortgage instead of a 30-year mortgage. While your monthly payments will be higher with a shorter loan term, you can save $50,000 or more in interest charges over the life of the loan. In addition, short loans often receive better mortgage rates than long loans.

After You Purchase Your Home:

Pay more than the minimum: Pay more than the minimum payments and direct the extra money toward your loan balance. Also use any tax refunds and work bonuses to further pay down your loan. Since interest accumulates only on the principal balance, chopping away at that balance reduces the total amount paid for the loan.

Make frequent payments: Instead of writing one large check monthly, make two half-payments every two weeks. Your total payment amount stays the same, but you will accumulate less interest. Furthermore, bi-weekly payments will lead to 13 payments per year instead of just 12.

Don’t be afraid of refinancing: If you can get a better interest rate or cut the loan term from 30 years to 15, you are likely to save money. Refinancing is best for people who plan to stay in the home for several more years, have not already paid more than a quarter of the existing mortgage, and are not required to pay prepayment penalties in order to switch loans.

Overall, understand the home loan process and plan ahead for the best circumstances that will help you meet your goals. While owning a home is a great feeling, paying less money on your loan will leave room for life’s other pleasures.

Tom is an editor at Money Choices where he posts about finding the best home loans for Australian home buyers. Visit MoneyChoices.com.au for more reviews and articles written by Tom.