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These 2 Mortgage Savings Tips Should Be Etched In Stone

By Nathan Hamilton - Mar 5, 2017 at 6:45AM

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Take advantage and cut costs for your single largest monthly expense.

Hands holding a hammer and chisel to sculpt.

Image source: Getty Images.

Knowing that a monthly mortgage payment is probably a homeowner's single largest expense, it pays to reduce out-of-pocket costs, because homeowners risk falling short of budgeting goals or, worse, getting deeper into debt when mortgage costs are too high.

With that in mind, Motley Fool analysts Kristine Harjes and Nathan Hamilton discuss in the following video two mortgage savings tips that any homeowner can take advantage of, whether refinancing or when getting pre-approved for a mortgage. Tune in to learn more.

Kristine Harjes: For many people, a mortgage is the biggest expense that they will ever incur, and so when we think about mortgages, we're rightly thinking, "How can I save the most money possible?" Can you share with us some tips?

Nathan Hamilton: Yeah, these are two important tips, and it's very important to consider that your mortgage is your largest monthly expense. It is your largest purchase over your life. So if you look at it, anything you can do to lower that cost is going to have a huge advantage for your ability to invest in your future, save money, pay for your kid's tuition, and so forth.

One way to do that -- and it's not so much something that many people use -- is consider a 15-year mortgage. It requires more money from you, but essentially a 15-year mortgage is lower risk to a bank, you're going to get a much lower interest rate, and this has sort of a double-whammy effect on your finances.

If you are getting a lower interest rate, obviously you're paying less. If you're getting a lower interest rate on a 15-year mortgage versus a 30-year mortgage, you are paying far less interest over the life of that loan. Now, the one thing that you have to consider is obviously with a shorter-term loan, you're going to be paying more money.

Harjes: Right, and for many people that's simply not an option. Roughly 80% of mortgages that are originated are a 30-year, fixed-rate term. But if you can go for the 15-year one, it might save you a ton of money. Plus, 15 years later, you're done.

Hamilton: Yes. You own your home outright.

Harjes: Right. What's another tip for us?

Hamilton: So do everything possible to increase your credit score. It is the most important three-digit number in your financial life, because your credit score determines what interest rate you get on the mortgage. If you do indeed happen to go the route that most people do with a 30-year mortgage, that interest rate becomes even more important, because with interest rates you're paying on a mortgage, you're essentially compounding the interest in someone else's favor, not yours, whereas when you're investing and you want a high rate of return, you're getting interest compounded in your favor. So when it's working against you, do whatever possible you can to reduce your interest rate, and the best way to do so is by increasing your FICO score.

Harjes: And is that something that most people can do fairly easily?

Hamilton: It's very easy to do, but it does take some time. So to get a credit score above 800 -- about one in nine people have a perfect credit score going above 800. Now, tips you can do to get there. Paying on time is the single biggest factor. Thirty-five percent of your FICO score is based upon just paying your bill on time. The other part of it -- 30% of your FICO score -- is impacted by how much credit utilization you have. So if you have $100,000 in available credit, and you're not using any of it, your FICO score is going to improve.

Harjes: Interesting. If you're looking for even more tips like this, you can check out fool.com/mortgages and download our free mortgage report called "5 Tips to Increase Your Credit Score Over 800."

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