Zariah: How to Save Money on Your Mortgage

Despite the tepid national economy, home ownership remains one of the cornerstones of the American dream. For most people who are responsible with their mortgage application, it’s still a great investment for the long term.

But it’s not as easy as it sounds. For scores of prospective homeowners, the prospect of finding, then financing a new home can be daunting. The key is to take it a step at a time, and be as thorough as possible because purchasing a home is one of the biggest fiscal decisions a person can make. Rushing in or relying on ill-informed (or even ill-intentioned) lenders can lead to long-term disaster.

Prospective home buyers should bring a high degree of scrutiny to skepticism to the process. They should also keep an eye open for any and all ways to save money on their home mortgages. These are big-time expenses that can handcuff families financially for years. Finding ways to save even a little each week or month can make a huge difference over the life of a mortgage.

Below are a few options for homeowners to consider when looking for cost-saving approaches to their home mortgages:

Own Your Credit Report

A 2004 study by U.S. PIRG found that 25 percent of credit reports contain errors serious enough to keep consumers from obtaining home loans and even jobs. Make sure to scour your credit reports and keep close watch for oddities with balances, dates and account statuses. If you do find errors, take careful note and start putting together documentation and letters to the credit agency that bolster your case. Take these errors seriously as even small mistakes and inaccuracies can lead to big impacts on your credit score. Correcting those errors can help boost your credit score and open the door to more favorable loan terms.

Think Long and Hard About the Length of the Loan

It is a simple yet powerful maxim: Get the briefest mortgage term you can reasonably afford. For most new homeowners, you’ll spend a big chunk of time and money paying down your interest before you ever start eating away at the principal. There are lenders and math junkies with multiple examples and breakdowns explaining how much more money you’ll pay for those extra 10 years if you opt for a 30-year mortgage instead of a 20-year. Financing $80,000 at 7 percent interest, a borrower would save more than $42,000 with a 20-year mortgage instead of a 30-year. Those savings would almost double if you could whittle it to a 10-year term. The point is, scrutinize your immediate and long-term financial situation and consider skimping for a few years to save a lot of money in the long run.

Make One Extra Mortgage Payment Per Year

Putting a little extra in the envelope each month can make a huge difference. Assume you’ve got a $100,000 mortgage at 7 percent interest and a 20-year term. By putting just $100 more toward the principal each month, you can shave off four years and about $20,000 in total payments. It’s another case where finding ways to scrape together a little extra cash each month can pay huge dividends. When sending in an extra payment, be sure to notify the mortgage holder that you want the additional funds applied toward the loan principal. Many homeowners send that additional monthly payment in a separate envelope, just to underscore the difference.

Assume an Existing Mortgage

It isn’t common, and some would argue that assumable mortgages are to be avoided at all costs. Many banks and sellers have little interest in these. But there are times when they can make sense and save prospective homeowners money. Sellers will typically require a cash down payment to make up for their pending loss of equity. Borrowers will have to pay the difference between the remaining debt and the home purchase price. These options can be a good deal for the buyer if the interest rate on the mortgage is better than current rates. Prospective buyers with more liquidity may also consider these unique mortgages structures.

Consider an 80-10-10 mortgage

You might hear this referred to as piggyback financing. These are actually two mortgages that combine to eliminate monthly private mortgage insurance payments. In essence, these specialized options cut a mortgage into two loans, where 80 percent is financed as a first mortgage, 10 percent is a second mortgage and the other 10 percent is typically a cash down payment. These loan payments are tax deductible, while PMI payments are not. An 80-10-10 mortgage also allows some buyers to purchase ahead of schedule, a key money saver in areas prime for a rebound in housing prices.

Find a Trusted Lender

This one is kind of a no-brainer, but it’s still incredibly important. Prospective buyers should conduct their due diligence and shop around until they find a lender they are truly comfortable with. Anyone who isn’t willing to answer questions thoroughly or work to save you as much money as possible probably isn’t a good fit. If you wouldn’t hire a shoddy mechanic, a suspect physician or a deadbeat lawyer, why settle when you’re dealing with a major long-term purchase like a new home?

This is a guest post by Brandon Laughridge of Mortgage Loan Place. MLP Specializes in educating consumers about mortgages with an emphasis on FHA loans. Try their free mortgage calculator or follow them on twitter if you liked this article.

—
Related Articles at Personal Finance Blog by Money Ning: