5 Ways to Save Money on Your Long-Term Mortgage Costs

Reader question: “I’m buying my first house this year, but I really need to control the costs as much as possible. How can I save money on my mortgage when buying a home?”

There are several ways to reduce the costs associated with a mortgage loan (and, by extension, the size of your monthly loan payments). You have more control over some factors than others, and we’ll get into that in just a moment.

First, I’d like to stress the importance of establishing a monthly housing budget for yourself, and then making sure that your mortgage payment stays within that range. This is where a lot of first-time buyers make costly errors that sometimes result in foreclosure. If you stay within your budget, you will greatly reduce the chance of future financial setbacks.

5 Tips for Saving Money on a Mortgage Loan

Now, on to the question at hand. How can you save money on your mortgage loan? Here are some strategies to consider:

1. Maintain a good credit score.

Your credit score is a three-digit number that indicates how much risk you bring, as a potential mortgage borrower. It also has the potential to save you thousands of dollars over the life of the loan.

If you have bad credit, the lender will most likely charge you a higher interest rate, compared to a borrower with a higher score. This increases the size of your monthly payments. So it’s possible to save money on mortgage costs by improving your credit score prior to taking on the loan.

Read: Tips for boosting your credit score

2. Shop around and get multiple offers.

Different lenders will offer you different rates, even with your credit score and other factors being equal. The reason is that they interpret risk and price their loans differently, depending on their individual business models. On top of that, they all charge different amounts of fees.

Getting offers / quotes from a handful of lenders will help you find the best deal, in terms of the rate and fees. This is a key strategy for saving money on your mortgage loan costs.

3. Save for a larger down payment.

Note: This strategy will obviously cost you more money up front. But it could save you a lot more over time by helping you secure a lower interest rate on the loan, and by avoiding the added cost of private mortgage insurance (PMI).

Many first-time buyers fail to save enough money for their down payment. As a result, they have a harder time finding a loan. And when they do find one, they end up paying a higher interest rate. If you want to qualify for the best rates a lender has available, you’ll probably have to make a 20% down payment.

Additionally, if you put down 20% or more, you won’t have to pay for PMI on top of everything else. This could further reduce the size of your monthly payments.

Yes, you’re spending more money up front. But you’re also reducing the overall cost of borrowing by securing a lower rate and avoiding costly mortgage insurance. Over time, this might save you a substantial amount of money on your home loan costs.

4. Consider paying points.

This is another way to save money on a mortgage over the long term by paying more up front. With this strategy, you are essentially buying a lower interest rate on the loan by using discount points. They are also tax-deductible in most cases.

A “point” is equal to one percent of the amount being borrowed. So for a mortgage loan in the amount of $200,000, one point would equal $2,000. By paying for points at closing, you could secure a lower interest rate on the loan.

Read: When should I use mortgage points?

Most lenders will offer you this option, because it gives them more cash flow in the present. In many cases, it can help you save money on mortgage costs in the long run. Of course, you’ll have to do the math to see if it works out in your favor. If you refinance or sell the home before you reach your “break-even” point, you might not recoup the extra amount you paid in points on the front end. So it’s definitely a long-term money-saving strategy.

5. Buy a cheaper house.

Have you ever heard the expression “house poor”? This is when homeowners spend so much money on their homes that they have little or no money left over for anything else. They cannot afford to save for retirement, go out to eat, plan a vacation, etc. Their housing expenses leave them with no disposable income. This is not a nice position to be in. Trust me, I’ve been there.

If you really want to save money on your housing costs, start by buying a home that is well within your financial comfort zone. It might mean scratching a few items off your wish list, or making a longer commute to and from work, or even living in your “second choice” neighborhood. But all of these things are better than being house poor.

This article explains how to save money on a mortgage loan over time, by reducing your long-term costs. If you would like to learn more about this topic, check out the home loan process section of our website or use the search tool at the top of this page.