Mortgage Tips: 9 Ways to Lower Your Monthly Payment
March 21, 2014 by
We often hear information on how homeowners can use tactics like refinancing to lower their mortgage payments. But what about homebuyers? What tactics can you use to ensure you start out with the lowest possible mortgage payment?Luckily, there’s quite a bit you can do as a homebuyer to keep your mortgage payments low. Here are just 9 ideas to get you started:
1. Boost your credit score
Your credit score is a big determining factor in your mortgage’s APR. And even a tiny difference in APR has a big impact on monthly payments (as well as interest paid over the life of your loan).
According to this FICO chart, average interest rates on a 30-year fixed mortgage range from 4.004% to 5.593% right now, depending on your credit score. On a $150,000 mortgage loan, the difference between the highest and lowest interest rates translates into $144 per month.
2. Save up a hefty down payment
A bigger down payment lowers your mortgage payment in several ways. A larger down payment means you borrow less, which of course lowers the monthly payment. The size of a down payment is also one factor used to determine interest rates. Higher down payments can qualify you for a lower rate. And with a down payment of at least 20%, you can avoid paying for Private Mortgage Insurance.
3. Avoid Private Mortgage Insurance
Private Mortgage Insurance (PMI) is added to nearly all mortgages where you put less than 20% down. This third-party insurance helps lenders get their money back if you default on your loan.
Typical PMI payments range from 1-2% of the outstanding principle on your loan, divided into twelve monthly payments added to your mortgage payments. On a $150,000 loan, for instance, PMI can add up to around $125 a month.
To avoid PMI charges, put 20% or more down on your home purchase. Or, if this is impossible for you, shop around for special loan programs that don’t require PMI. They’re relatively rare, but some local banks and credit unions do offer low down payment, no PMI mortgage programs.
If you do have to pay PMI, pay attention to your home’s loan-to-value ratio. As soon as you have 20% or more equity in your home, refinance or cancel your PMI.
4. Shop with at least three lenders
For some reason, many people are more likely to shop around for a good deal on a $100 vacuum cleaner than a $100,000 home loan. But you can save big by shopping with different lenders.
Even with the same mortgage amount, down payment, and credit score, different lenders will give you different mortgage plans. So take time to shop with at least three lenders before settling on the one you’ll work with to buy your home.
(Bonus: If you apply for mortgage approval with all of these lender’s within a 30-day window, you’ll only get one hard pull on your credit, so you won’t ding your score as much.)
5. Check out real estate taxes before you buy
While real estate taxes aren’t technically part of your mortgage, most lenders require that you pay a portion of your taxes with each mortgage payment. The monthly payments are put into an escrow account, and the lender takes care of making your tax payments.
Within a small area, real estate taxes can vary dramatically. So talk to a knowledgeable lender or do some research online to find the area near you with the lowest real estate taxes.
6. Compare homeowner’s insurance prices
Like real estate taxes, your homeowner’s insurance premiums will likely be rolled in with your mortgage payments, escrowed, and paid by your lender. But this doesn’t mean your lender can force you to choose a particular insurance company.
So before you sign on the dotted line for homeowner’s insurance, shop around for a policy that suits your needs for your home, and that features low premiums. Remember, you can often save on premiums if you bundle your auto and home insurance.
7. Pay for points
When you buy a home, you can choose to purchase discount points – which are fees you pay to the lender at closing to get a reduced interest rate. Usually, one point is 1% of your mortgage amount, and one point will lower the interest rate by a few tenths of a percent.
Sometimes, buying points is helpful, and sometimes it’s not. The key here is to talk with your lender about how much each point will lower your mortgage payments. Then, calculate how long it will take you to break even (in a very loose calculation) by dividing the money paid for points by the total monthly savings. For instance, if you pay $3,000 to save $40 per month, your break-even point would be 6 years and 3 months.
8. Consider a longer term
While short-term mortgages are nice for getting out of debt faster and saving a load on interest payments, they also result in higher monthly payments. When you’re shopping for a mortgage, compare 15-, 20-, and 30-year mortgage options. Look at both monthly payments and interest paid over the life of the loan to determine which option suits you best.
9. Downsize your home and your payments
The easiest way to downsize your monthly mortgage payments is to buy a smaller, more affordable home. It’s tempting to buy the most expensive home you can afford. Instead aim to spend no more than 20% of your monthly income on a mortgage payment. If you can also live close to where you work, you’ll save a bundle on transportation costs, too.
Can you think of any other ways to save on your mortgage payments?
Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing.
