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Getting a home loan marks a big financial milestone. And a home's sale price isn't the only factor that affects the total cost of a new home loan. Your down payment amount, interest rate and length of your loan term will all shape your monthly mortgage payment. The good news is there are several strategies for reducing how much you'll ultimately pay each month. Here's how to save money on a new home loan.
1. Increase Your Down Payment
Putting down 20% has long been touted as the gold standard for down payments, but it can also be a barrier to homeownership. The national median home price at the time of this writing is $375,300, according to the National Association of Realtors. A 20% down payment on a home in that price range would be more than $70,000.
Saving that amount is out of reach for many folks, but if it's possible to save up a 20% down payment, you can significantly reduce your monthly loan payment and avoid paying mortgage insurance. If 20% isn't likely to happen for you, narrow down how much house you can afford and set a goal for making as big of a down payment as possible with your budget.
Let's say you find a home for $300,000 and put down 5% ($15,000) for a 30-year fixed mortgage. Assuming an interest rate of 5%, your monthly mortgage payment would be roughly $2,020. Bumping up the down payment reduces the amount you have to borrow to finance the home purchase. Putting down 15% here would bring your monthly payment down to $1,776 and give you more equity in your home right from the start.
2. Improve Your Credit
The stronger your credit score, the more likely you'll be to qualify for a lower mortgage interest rate. That's because mortgage lenders generally use your credit score as an indicator of how likely you'll be to repay your home loan as promised. A good credit score suggests that you know how to handle credit responsibly. On the flip side, a lower score could peg you as a risky borrower. Mortgage lenders charge higher interest rates in this case to protect themselves from the possibility of a loan default.
It's smart to improve your credit before applying for a home loan because a lower interest rate works out to a smaller monthly payment and savings of potentially thousands of dollars over the life of the loan. Here are a few simple ways to strengthen your credit:
- Make all your debt payments on time. Even one payment over 30 days late could do serious damage to your score.
- Reduce your credit card balances. Lowering your credit utilization can help boost scores quickly.
- Avoid applying for new credit until after you close on your home. New credit inquiries on your credit report could dock your scores by a few points at a time when you need to put your best scores forward. New debt could also change your debt-to-income ratio and affect your ability to qualify for a mortgage loan.
- Check your credit report for inaccuracies. If you see something amiss, you can ask your lender to correct the error or dispute it with the credit bureau on whose report it appears.
- Get credit for your monthly bills. Experian Boost®ø can help you improve your credit scores instantly by adding on-time phone, utility, internet and streaming service payments to your Experian credit report.
3. Opt for a Longer Mortgage Term
Like any type of loan, you can bring down your payment by going with a longer loan term. Let's assume you're making a 10% down payment on a $300,000 home with a 5% interest rate. With a 15-year fixed mortgage, your monthly payment (including taxes and insurance) would be close to $2,600. But if you stretch the loan term out to 30 years, that number goes down to $1,907.
While a longer term can make for a more manageable monthly payment, the trade-off is that you'll ultimately pay more in interest over the life of the loan. In the example above, total interest paid for the longer loan term is $137,464 more than the shorter term. That's a lot of money over the long run, so you'll have to decide if it's worth the lower monthly payment.
4. Buy a Less Expensive Home
Another way to save money on a new home loan is to opt for a less expensive property. In 11 housing markets across the U.S., average home prices now exceed $500,000, according to a recent survey by OJO Labs, a real estate and financial planning site. Readjusting your expectations could help you secure a mortgage that doesn't break your monthly budget. This might mean going with a smaller home or exploring a different neighborhood where home prices are more reasonable.
You might also consider relocating to an area that has cheaper property taxes. Many homeowners have their property taxes and homeowners insurance rolled into their mortgage payment by way of an escrow account. Reducing your expenses here could also bring down your total spending.
5. Wait Until the Housing Market Cools Down
At the time of this writing, the national median home sale price is up 15% from a year earlier, according to the National Association of Realtors—and inventory is down. One way to save may be to push pause on your house hunt until the market cools down a bit. Just keep in mind that interest rates are predicted to rise, which could negate wins in reduced home prices.
While waiting for a red-hot housing market to simmer down, prospective homebuyers can use that time to improve their credit and save for a larger down payment. This way they'll be in a stronger financial position if and when the market does begin to correct.
6. Negotiate Your Closing Costs
Closing costs typically add 2% to 5% to a home's purchase price. They account for all kinds of fees related to making your home loan, including:
- Loan origination fee
- Home inspection fee
- Appraisal fee
- Fees related to title search services
Now for a bright spot: There may be room for negotiation. Connect with your lender, seller and real estate agent to see what might be on the table. The seller, for example, may be open to covering some of the closing costs. You may have more leverage if the home needs some work. The real estate agent's commission fee may also be negotiable.
The Bottom Line
Taking out a new home loan comes with all sorts of costs, but many are not set in stone. Making sure your credit is in good shape before applying for your mortgage is one of the most important steps you can take to help reduce your loan costs. This begins with checking your credit score and credit report for free with Experian.