Tuesday, November 26, 2013, AM | 1 Comment
Only a very small percentage of home buyers can afford to pay cash for a house. Most have to finance their home. If you do not have sufficient savings, or you do not want to tie up funds that you might need to use elsewhere, you will need to get a home mortgage. While you may need to get a home mortgage, you do not have to settle for just any home loan.
If you want to save money when shopping for a mortgage, there are a few steps to take and decisions to make.
Improve your Credit Score
People with excellent credit scores and a strong history of paying their bills on time will qualify for lower interest rates when they apply for a mortgage. Before you even start shopping for a house, you should check your credit score and see if it could use some improvement. A lender will review both your credit score and your income. The terms of your mortgage are based on many factors including your debt to income ratio and the percentage of debt to available credit. Improving your credit by paying off credit card balances, car notes, or other consumer debt, will increase your credit score and help you qualify for lower interest rates on your mortgage.
Get a Mortgage with a Shorter Term
Instead of taking out a 30-year fixed rate mortgage, you should consider a 15-year fixed rate mortgage. You can save a huge amount of money in interest charges if you finance the loan over a shorter term. You will build equity much faster with the shorter term because more of your monthly payment goes toward the reduction of principal. Your monthly mortgage payment will be a little higher with a 15-year loan compared to a 30-year loan, but not that much more. If you can afford to pay another few hundred dollars per month, you will save money in interest and own your home much sooner.
If you already have a mortgage, you can still save money in a number of different ways. While there are many different types of mortgages, most allow you to make additional payments of principal to reduce the balance on the loan. If you are paying higher than current market interest rates, you may be able to save by refinancing your home mortgage.
Make an Extra Payment
You can reduce the total amount of interest you will have to pay on your mortgage by paying more than the amount of your scheduled monthly mortgage payment. When you send in your payment, include a second check and indicate that the extra funds are to be applied to the reduction of principal. When you receive your monthly statement you will notice that the principal balance has dropped by the extra amount you paid (plus the normal principal reduction from your regular mortgage payment).
The more you can pay toward reducing your principal, the closer you will get toward paying off your loan in full. Even $50 per month can have a big effect on a 30-year mortgage.
Refinancing out of a mortgage with a high interest rate into a mortgage with a lower interest rate can be beneficial in many cases. You have to run the numbers and consider any closing costs and other fees you may have to pay when you refinance. Lenders will do the calculations for you to see how much money you can save on a new home mortgage.
As you can see, saving on your home mortgage is largely a function of interest rates and the length of time it takes you to pay off your mortgage. Talk to a trusted adviser and explore all of your options before deciding how to proceed.
Joshua Turner is a writer who creates informative articles in relation to business. In this article, he offers legal and financial tips to homeowners and aims to encourage further study through Law Programs Online.
- Sep 26, 2014: How To Save Money On Your Home Mortgage | Finance Trigger