How to Reduce the Cost of Your Mortgage

Housing costs are one of the biggest monthly expenses people have. Fortunately, there are several ways to reduce them. Shopping around for mortgage rates, using a broker to help find a lender, having a consistent work history, shortening a loan, paying for points, and maintaining a good credit score can help cut down on the cost of a mortgage. Some people end up refinancing their mortgages to reduce their monthly mortgage obligations, while others take a less risky approach by getting a lender to reduce their monthly mortgage rates. Whatever method you choose, it's easy to start chiseling away at your mortgage rate.

Since the 1990s, most Americans have spent more on homes than any other financial investment. Purchasing a home is a large financial obligation, but the good news is that you can reduce your payments through various financing options. You can get a handle on homeownership costs starting with your mortgage and the interest rate associated with the mortgage. The lower your mortgage rate is, the less money you will have to pay over the loan's lifetime.

Before trying to get a cheaper mortgage, you'll have to do some thinking. Do you want a fixed or variable rate? Would you rather pay off more of your mortgage up front, or spread out your payments over a longer period of time? After considering these questions, you can start to find other ways to reduce your mortgage payments.

Mortgages come in two types: fixed and variable. Fixed-rate mortgages define repayments for a set period of time. They extend for certain periods of time, like three or five years. The advantage of a fixed-rate mortgage is that you'll know how much money you will have to pay each month for a specific number of years. In contrast, a variable rate fluctuates along with the base bank rate. A variable rate can end up being more expensive in the long run than the fixed rate, but it can also end up being cheaper. With a variable rate, prices may increase at any point. This type of mortgage is best if you have a larger financial cushion to work with.

After deciding what kind of mortgage to get, you'll have to figure out whether you want a short-term or a long-term payment plan. Another consideration when choosing a payment plan length is figuring out what additional costs you might encounter later on if you decide to remortgage. While you might initially choose to have a shorter rate payment plan, you may end up paying twice as much in fees if you take out two back-to-back fixed rate plans instead of one continuous four-year plan.

When choosing a loan repayment plan, keep in mind the mortgage's loan-to-value. In other words, what size is the loan in regards to the value of the home? Borrowing at a higher percentage of the property's value (say 90 percent) will come with a much higher interest rate than if you borrow at a lower percentage (60 percent) of the home's value. If you save up for a more substantial deposit, you will have a smaller interest rate, which translates to smaller repayments.

Another way to reduce mortgage payments is to forego adding the mortgage fee to the mortgage balance. Many mortgages carry a product fee for taking out a loan, and those fees can be quite expensive. Consequently, a number of borrowers choose to have the fee tacked on to the mortgage balance to avoid paying it up front. But this plan sometimes backfires, as mortgage holders pay more interest on the fee over time. If possible, a good solution is to pay the product fee in one lump sum. Some people also look for mortgages that do not charge any kind of product fee. These mortgages, however, generally come with a higher interest rate. They may not save much, if any, cash over a long period of time.

Sometimes, homebuyers ask to adjust the terms of their mortgage. In the past, many borrowers have chosen a 25-year mortgage term. You can reduce your monthly payments by extending the term of your mortgage, which might sound appealing at first. However, bear in mind that you will wind up paying more over time, as you will have to keep paying interest on outstanding debt for longer periods of time. Contrarily, you can reduce your mortgage term. This will increase your monthly payments, but it also translates to a less expensive mortgage in the end.

Experts also advise overpaying when possible. Many mortgages allow homeowners to overpay by about 10 percent each year without incurring additional fees. Doing this allows you to pay off the total mortgage balance more quickly, which saves thousands of dollars in interest fees. Similarly, you can also use your savings to reduce the cost of your mortgage repayments. The goal with this technique is to offset your savings balance against your outstanding mortgage balance. That way you'll only pay interest on the difference. One drawback to this approach is that with an offset you eliminate the possibility of earning interest on your savings.

Before signing a mortgage, and instead of just going to your bank, shop around for a good deal. Some of the best deals come from lesser known lenders. By doing your research and comparing rates, you can realize potentially significant savings. Shopping online, you can even compare mortgage rates from banks nationwide with those of your local bank. Also check with your local credit union to see if they offer more attractive rates. When you find a good rate, you may have the power to negotiate an even lower price. Experts at FICO say that if you have a credit score of 800 or higher (which 9 out of 10 Americans do), you can ask a lender to match a competitor's rate, or ask for a lower interest rate based on your solid credit history. Lenders want to attract people with good credit scores, so they will quite often make compromises to get your business. Lenders may also evaluate your work history. They prefer to see a steady, consistent work history. Frequent job changes might make lenders less optimistic about a steady income. Therefore, they'll be less inclined to offer an attractive rate. You'll also need to verify your employment status before making an offer on a home and before closing the home sale.

To cut the cost of your mortgage, you can also put more money down on your house purchase. A small loan, usually around $100,000 or less, often carries a higher interest rate so that lenders make a profit. But on the high end of the spectrum, home loans over $417,000, called "jumbo loans," carry a higher risk for the bank. They often have higher loans as a result, so your best bet is to go with a loan somewhere between those two figures. Putting down enough money to get your mortgage out of the jumbo category can result in savings of thousands annually over the course of your loan's lifetime.

Some prospective homeowners choose to lower their mortgage by paying for points. With this strategy, you can pay an upfront fee to lower your mortgage rates. Each point equals about one percent of the loan's value, and paying each point reduces your continuing interest rate by about 0.125 percent. For example, paying one point on a $250,000 loan might cost an additional $2,500, but it reduces your interest rates by 0.125 percent over the lifetime of the loan. This strategy, works best for people who are looking to stay in their homes for a long period of time. By reducing your mortgage rate, you can save money over a 15- to 30-year period of time. However, most Americans live in their homes for less than 10 years, which is a factor that mortgage seekers should consider.

Refinancing an existing mortgage is a common method that homeowners use to lower their monthly rates. With relatively low mortgage rates, homeowners who are paying 100 base points or more over their ongoing rates should consider refinancing. An added benefit of refinancing is that it lets you hunt around to get the best mortgage rates available. You might find rates lower than what your current lender offers. If this is the case, you can either go with the new lender, or ask your current lender to match the competitor's price. This is best accomplished if you have a high credit score (800 or higher). To determine whether or not it is worth it for you to refinance a mortgage, use a mortgage-loan calculator. That way, you can decide if refinancing, which includes refinancing fees, is worth the time and effort.

When you do get a mortgage, ask your financial institution if you can set up automatic payments. This tells the lender that you will never be late on payments, which alone can lower your interest rate. Keep in mind, however, that you may face a fee if you close the account or change banks.

If you don't feel comfortable handling the mortgage shopping yourself, consult a mortgage broker. He or she will likely know which lenders loan to people in similar circumstances to your own. A mortgage broker can also have access to other lenders that don't deal directly with borrowers, which can be a good deal for you.

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