So you’re looking to purchase a home, but cash flow is an issue, and you want to make sure that your monthly mortgage payment is as low as possible. Here are eight great strategies for shrinking your prospective monthly mortgage payment as you prepare to purchase your home.
Make a large down payment. The more cash you can put down at closing time, the less you will have to borrow. This decreases not only your mortgage principal, but also the amount of interest you’ll be paying. Higher down payments can also get you better interest rates.
Make a large enough down payment to avoid private mortgage insurance, or PMI. PMI is third-party insurance that most lenders will insist you get if you put down less than a 20 percent down payment. It’s their way of making sure they’ll get enough money back if you default on the loan. If you can’t put down at least 20 percent, then shop around for a loan at one of those few banks or credit unions that doesn’t require PMI. If you have no choice but to pay for it, remember to cancel your PMI (or refinance your entire loan) once the equity in your home reaches 20 percent.
Shop for a good deal on mortgage lenders and insurance the same way you would for any other item. Every lender and insurance company works differently, which means that each company will likely come up with a different package for you. Taking the time to shop your loan to at least three or four lenders and insurance companies will make sure that you’re getting the best packages possible — and don’t forget to bundle your auto and home insurance to get a further discount.
Check each town’s real estate tax rates. Most likely you’ll be looking for a home in an area with a few different towns or suburbs. The same way that you want to shop for towns with good schools, check out their real estate tax rates as well. A home bought in an area with lower real estate taxes can save you significantly on your payments—for every year that you own the home, not just while you have a mortgage.
Consider points. Points are the fees that you have to pay when buying a house, and it’s possible to purchase points that will lower your interest rates. Take the time to do the math and figure out how long it would take you to break even—simply divide the cost of the points by the amount you save per month ($5,000 / $50, for example, would require 100 payments, or roughly 8.3 years, to break even)—and whether that aligns with how long you plan to own the home.
Talk terms. Long-term mortgages divide the payments over a longer period of time, so the monthly cost is less, but it will take you longer to pay off the mortgage. Short-term mortgages pay off the debt more quickly and accrue less interest, but the monthly bills are higher. Figure out which method works best for you.
Think smaller. When shopping for a new home, ask yourself whether you really need all that space, inside and out. If you can find a smaller home on a smaller plot of land, you’ll pay less.
Don’t forget to bump up your credit score.Credit scores are a major factor lenders look at when determining interest rates, with the better scores resulting in rates that are much more favorable. In fact, a good credit score can reduce one’s mortgage rate by as much as 1.5%, which would translate to a savings of roughly $190 per month for a $200,000 loan. Anything you can do to fix errors in your credit score or improve your payment performance will help improve your mortgage interest rate and lower your payments.
So when you start looking for a home, keep these handy tools in mind. They will help you find the lowest mortgage payments possible. And along the way, should you need any assistance with credit repair, Ovation is here to help.