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Whether you’re doing it for the first time, upsizing or downsizing, or relocating for work or family, buying a home is likely to come with your biggest monthly expense: the mortgage payment.
According to the U.S. Bureau of Labor and Statistics, the average American family spends a total of about $5,100 per month, and a whopping one-third of that goes toward housing. For context, the next-biggest expense, transportation, takes up only 16 percent of the monthly budget.
And housing costs have risen faster than have middle-class incomes over the past decade or so, which means saving every penny you can when buying a home is increasingly important. If you’re in the market for one, here are four ways to save on your mortgage when financing a home purchase.
Improve your credit score
Often, the low mortgage interest rates you see advertised online are the ones available only to borrowers with top-tier credit scores. With a credit score of 700, your interest rate will be higher than someone with an 800 score. And someone with a 650 score will pay more than you will.
It behooves any potential home buyer, then, to improve their credit score as best they can. It takes some work, but you can get a copy of your credit report and examine it for any possible mistakes that could be weighing you down. You could dispute questionable entries and ask creditors to remove old negative items.
It also helps to pay down any existing balances, especially the ones you can get to zero, and to make all your payments on time while you’re doing your home search.
Put more money down
A counter-argument to paying down your other debt is that it can take away from your savings toward the down payment on a home. And putting more money down is a sure way to save money on mortgage payments.
For one, you’re borrowing less money, so you will pay less in total interest, which over the course of a 30-year loan can be a substantial amount.
Putting 80 percent of the purchase price down also helps you avoid paying for private mortgage insurance (PMI), which could easily cost upwards of $2,000 per year on a U.S. median sales-priced home.
It’s prudent to approach a lender for a pre-approval letter before making an offer on a home, and you might be eager to lock in an attractive interest rate they offer at that time. But rates change frequently, especially in a competitive, low-rate environment. It makes sense to shop around for the best deal you can find, even if you feel you have a relationship with one lender.
Not only are different lenders’ rates sometimes different but so are closing costs from lender to lender. Make sure to get apples-to-apples pricing on rates, possible points to be paid, and closing costs before picking your mortgage company.
Sometimes, the real estate agent you work with will have a relationship with a lender that may benefit home buyers. Don’t shy away from getting professional recommendations.
Think about a “fixer-upper”
Marketing a home as “move-in ready” is a way to entice buyers who don’t want to do any work on a home they move into. It sounds great, but a home that’s move-in ready is likely priced at the top of the market. The buyer will pay for most of the home improvements that are already done.
Meanwhile, a home that needs a little work is likely to be lower-priced. Spending an amount that’s not at the top of your budget is a way to not break that budget. And if you can do any of the needed work yourself – painting, laying tile, changing fixtures – you’ll save even more money.
The bottom line
A home is the biggest monthly expense for most people. There’s no shame in working hard to save money on your mortgage, and it usually can be done with a few simple strategies.