When you’re ready to buy a house, it’s easy to get so excited about purchasing a new home that calculating the money you’ll pay in interest on a mortgage loan isn’t at the top of your list. It should be, though.
Depending on the interest rate and size of the mortgage, over a 30-year loan term, you could pay more than $100,000 in interest alone. And you’ll pay a lot more interest than that on loans for several hundred thousand dollars. With the right strategies in place, however, you can save thousands of dollars on your mortgage loan.
1. Shop for a lender
The Consumer Financial Protection Bureau recommends comparing quotes on mortgage loans from three or more lenders. Before you choose a lender, compare official loan estimates again, since interest rates can change between the original estimate and the date you take out the loan.
Don’t hesitate to bargain by asking one lender to match a better rate offered by another lender.
2. Improve your credit score
If your credit score isn’t in the good to excellent range, it’s generally harder to get a mortgage loan, and if you do obtain a loan, you’ll probably pay a higher interest rate.
Don’t be in a hurry to buy a house if you’re still working on bumping up your credit score to a more creditworthy rating. Wait until your credit score improves to save thousands over the term of the loan with a lower interest rate.
3. Put down a larger payment
Saving for a large down payment can take years but the effort will pay off when it comes to your mortgage loan. For one thing, you’re borrowing less, so the loan will be smaller. But there are other money-saving advantages, too.
For instance, if you put down 20% of the home price, you won’t get stuck with private mortgage insurance (PMI) premiums, which get tacked on to your monthly payment. You will also pay less in interest over the life of the loan and have immediate equity in your home, offering a cash cushion if home prices drop.
4. Go for a shorter loan term
Many homebuyers have a fixed rate mortgage, taking take out a 30-year mortgage, which generally requires lower monthly payments than a shorter-term loan. However, you’ll save a huge amount of money and pay the mortgage off faster with a 15 year or another shorter-term mortgage.
For example, if you take out a mortgage loan for $180,000 at 3.77% interest, you’ll pay more than $120,000 in interest over the life of the loan. Take out a 15-year mortgage, which typically offers a lower interest rate but slightly higher monthly payments, at 3.25%, and you’ll pay more than $40,000 in interest. That’s a savings of around $80,000.
5. Make additional monthly payments to principal
You can save thousands of dollars on your mortgage loan and pay it faster by adding an extra payment amount each month directly to the loan principal.
For instance, if you pay an additional $100 per month on a 30-year $180,000 loan at 3.75% interest, you’ll save more than $24,000 and pay the loan off about five years earlier. Paying only $50 extra each month will still save more than $13,000 over the life of the loan and pay the mortgage off three years early.
6. Make bi-weekly payments
Since most of your monthly mortgage payment is applied to interest in the early years of the loan, you can save thousands of dollars in interest simply by making bi-weekly instead of monthly payments. That doesn’t mean you have to make two full payments twice a month, though.
Here’s how it works. If your monthly mortgage payment is $833 and you make bi-weekly payments of $417, that adds an extra month’s payment annually. So, on a $180,000 30-year mortgage at 3.75%, making bi-weekly payments of $417 will save more than $18,000 over the loan term.
7. Refinance the original mortgage
If interest rates have dropped, and especially if your credit score has improved, you may be able to save thousands of dollars by refinancing your mortgage, even after closing and other costs on the new loan.
Refinancing lets you pay off your existing loan and take out a new mortgage at better terms and may be a good option if you plan to live in your house for a long time. However, if you’re planning to sell your house and buy a new home soon, hold off on refinancing and make sure you get better terms on your next mortgage loan.
