A house is likely the most expensive thing you will buy in your lifetime. You will spend a good chunk of your life paying for it, and on top of that, there are a lot of expenses that come with homeownership (taxes, maintenance, repairs, etc.) that you have to be prepared for. All things considered, buying a house is something that requires a lot of financial preparation.
One of the best ways to prepare for homeownership is to lower the cost of owning a home from the get-go. Before you start looking for your dream home, here are the best ways to reduce the cost of your mortgage:
- Shop around
A general rule of thumb when it comes to buying a house is to shop around for the best mortgage lender. Consider at least three or more options to find the most ideal mortgage rate based on your budget, your income, and your lifestyle. Even just a smidgen of difference in interest rates can mean thousands of dollars of savings for you in the long run.
If you need help finding the best lender for you, consider hiring a reputable mortgage broker that can offer valuable assistance in your hunt for the right mortgage lender.
- Buy a cheaper house
Of course, the best and easiest way to lower the cost of your mortgage is to buy a cheaper house than you can afford.
How do you know how much house you can afford? The 28%/36% rule is a great way to calculate that number. This rule states that you should not spend more than 28% of your monthly income on housing and home-related costs; and 36% on total debts (mortgage, credit cards, auto loans, student loans, etc.). However, this is just an estimate on how much you can afford, but it’s a good starting point to help you find the most appropriate house for your budget. Once you are ready to apply for a mortgage, you will have to get pre-qualified or pre-approved to determine how much mortgage you can borrow from a particular lender.
When you are given an estimate of how much you can borrow, look for a house with a price tag that is substantially smaller than that amount. Aside from making it easier to pay your mortgage every month, buying a cheaper house will give you more financial freedom as opposed to being “house-poor”, or the state wherein you can’t spend much on anything else because of your large mortgage.
- Put down more money
Making a substantial down payment on a house is an excellent way to lower the cost of your overall mortgage. Putting down at least 20% on your mortgage will make you a more attractive buyer, which will increase your chances of acquiring a lower interest rate (and qualifying for a better house). Moreover, it will help you avoid having to pay for private mortgage insurance, which typically costs between 0.5% and 1.5% of your loan balance.
You’re also lowering your monthly mortgage payments by putting down at least 20% on the house. This means that you’re paying less in interest and saving money in the long term, as well as freeing up more of your income for other important expenses.
- Shorten your loan life
Cutting down your amortization period may seem counterintuitive to reducing your mortgage costs, but it will save you a significant amount of money overall. For example, a 30-year mortgage will have you paying more in interest than a 15-year mortgage or even a 20-year mortgage. Aside from that, a longer amortization period will keep you locked in debt for a longer time, which means that you’re only going to be enjoying your full income again after half or a quarter of your life.
- Make accelerated payments and extra payments
Making accelerated biweekly or accelerated weekly payments means you’re paying slightly more than your regular monthly payments, which also means that you are paying a bit less in interest. And since you’re essentially making paying your mortgage for an extra month every year, you’ll be able to pay off your mortgage more quickly.
Another option is making extra lump-sum payments when you have money to spare, say, after receiving a bonus at work. Extra payments help you save money in interest and shorten the lifespan of your loan. Check your mortgage agreement to see what the rules are on making extra payments, as they can vary from lender to lender.
These tips can help you reduce the overall cost of your loan, which can translate into tens of thousands of dollars in savings in the long run. Having said that, it’s imperative that you consider the bigger picture before you start shopping around for a mortgage lender–remember, a house is huge financial responsibility, and you should find ways to lower your financial risk whenever possible.