3 Ways to Save Money on Your Next Mortgage

Home prices have risen rapidly in recent years and mortgage rates are higher as well. While the cost of homeownership has become less affordable, there are some factors in your control. Here are three things in particular that can help you save money when you use a mortgage to buy a home.

1. Shop around

One of the most common mistakes first-time (and repeat) home buyers make is not shopping around for a mortgage, and simply accepting the first loan offer they get. I certainly did this the first time I bought a home, and likely overpaid by thousands of dollars in the process.

It's difficult to overemphasize the importance of shopping around for a mortgage lender. Different lenders not only have different origination fees, features, and loan programs, but it's not uncommon for the same borrower to get offered significantly different interest rates from two lenders.

Let's say that you're looking to borrow $400,000 on a 30-year fixed-rate mortgage to buy a home. One lender offers you a loan with a 6.625% APR, while another offers 6.75%, both with the same $1,000 origination fee and no points. This might not sound like a big difference, but the lower rate would save you nearly $12,000 in interest over a 30-year term.

The point is that shopping around for a mortgage could be the best return on a few hours of your time that you've ever seen. Plus, there are special rules in credit scoring formulas that make sure consumers aren't penalized for rate-shopping.

2. Work on your credit

Building great credit takes years, but you might be surprised at the impact you can have with a few months of smart planning. And you might be shocked at how much of a difference a small jump in your credit score can make when it comes to mortgages.

Consider this example. If you have a FICO Score® of 650, you can expect a 30-year fixed-rate mortgage APR of 7.499% as of this writing, according to myFICO.com. On the other hand, a borrower with a 670 is seeing an average APR of 7.069%.

On a $400,000, 30-year mortgage, the monthly principal and interest payments on these loans would be $2,680 and $2,797, respectively. Over a 30-year mortgage term, this means that the borrower with a slightly higher credit score would save over $42,000 on interest.

3. Boost your down payment

It's a well-known fact that putting more money down when you buy a home can lower your monthly payment. And while it can certainly be a smart strategy to wait and save more for a down payment, that's not the only way to boost your available cash.

Most states and many local governments have down payment assistance programs, especially when it comes to first-time home buyers and those with low-to-moderate incomes. The Department of Housing and Urban Development (HUD) maintains a list of local home-buying programs that can be an excellent starting point.

The bottom line

Mortgage rates are roughly double where they were at the beginning of 2022, and home prices haven't exactly declined during that time. However, it could still be a good time to become a homeowner, and by using these strategies, you can make sure you will keep your housing costs as low as possible.