The fact is that homeownership is expensive. But did you know that there are multiple ways to save money on a mortgage?

As a borrower, it can often feel like much of the mortgage process is out of your control. But with careful preparation and planning, you can make a mortgage work within your budget.

In this article, we’ll share our best tips on how to save money on your mortgage—from your credit score to loan term options—and how to make homeownership affordable for you. 

Pre-planning: Improve your credit score and budget for a down payment

Before you even begin the mortgage process, there are steps you should take to set yourself up for success and loan approval.

Boost your credit score

First, focus on improving your credit score. In general, a higher score will give you access to more favorable interest rates.

You can improve your score in the following ways:

• Make all your debt payments on time every month
• Pay down your outstanding debts
• Keep your credit card balances low

A FICO credit score is based on the following percentages:

• 35%: payment history
• 30%: amounts owed
• 15%: length of credit history
• 10%: credit mix
• 10%: new credit

Your payment history and amounts owed make up 65% of your score, so keeping your balances low and making sure your payments are on time each month can significantly improve it.

Budget for a large down payment

If you’re wondering how a large down payment is beneficial to save on a mortgage, here’s how:

• A larger down payment reduces the principal amount you’ll borrow, meaning you’ll have a lower monthly payment and less interest over the life of the loan
• On a conventional loan, a down payment of 20% eliminates the need to pay private mortgage insurance (PMI)
• On an FHA loan, putting down 10% or more allows you to remove your mortgage insurance premiums (MIP) after 11 years

Borrowers who qualify for a VA loan or USDA loan may not even be required to make a down payment at all. Discuss your options with a lender to find out your full range of loan options.

If a significant down payment isn’t possible for you, just make as large of a payment as you can comfortably afford to access the best rates and benefits for your scenario.

Even if you can only afford the minimum, there are other ways you can save on your mortgage long-term.

Choose a longer or shorter loan term

Longer and shorter loan terms each have their own benefits to borrowers. 

A long-term loan of 30 years offers a lower monthly payment, while a short-term loan of 15 years has higher monthly payments but lower interest over the life of the loan.

30-year term

If you need to access the lowest monthly payment now, you can choose a 30-year term for lower payments stretched over a longer period of time.

For example, let’s say you’re purchasing a $320,000 home at a 6% fixed rate and making a 3% down payment.

Your principal and interest would total $1,829 per month over 30 years, for a total of $658,440.

15-year term

For the same home over a 15-year term, your monthly principal and interest would be $2,593, for a total of $466,740 by the end of the loan term.

That’s a difference of $191,700 between a 30-year loan and a 15-year loan.

Remember, you’re not locked into your term length forever. If you’re in a better place financially in the future, you can refinance to a shorter term length.

Consider a 2-1 buydown

Mortgage buydowns are a popular option to help borrowers save in the first few years of homeownership with a lowered interest rate.

In an ideal 2-1 buydown scenario, the seller will offer it as a concession and cover the required upfront payment.

In exchange for the payment, the borrower will receive a 2% lower interest rate in the first year of homeownership and a 1% lower rate in the second year. The original approved rate will resume in the third year.

For example: 

• You’re approved for a 7% interest rate on a mortgage . . .
• Interest will be 5% in the first year of the mortgage . . .
• 6% in the second year with a 2-1 buydown

The seller’s upfront fee covers the interest payments that will be lost during those two years of lower rates.

Make extra payments

Extra payments are another long-term strategy borrowers can use to reduce their principal and interest over the life of the loan.

You could commit to making one extra payment per year or set up a biweekly (semimonthly) payment plan if your lender allows it.

Both methods result in the borrower making one extra payment per year—they just go about it in different ways.

If there are years where you’re doing well financially or earn a bonus at your job, you could even make a couple additional payments per year. 

Every additional payment helps reduce your principal and interest you’ll pay over the length of the loan.

Refinance your mortgage

If you already have a mortgage, you can still access savings by refinancing for a more favorable interest rate or term length.

You’ll just have to make sure that the rate is favorable enough to make up for the additional closing costs and fees you’ll have to pay for your new loan.

Get Committed® with Compass Mortgage

The mortgage process begins with pre-approval, but not all lenders approach pre-approval the same way.

Compass Mortgage offers an exclusive program to our borrowers known as Get Committed®, a unique approach which goes beyond standard pre-approval. 

Get Committed® gives you a fully underwritten loan commitment that locks in your interest rate before you even find the property you want to buy so that you don’t miss out on the home that’s right for you.

A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.

With standard preapprovals, you haven’t secured a loan yet. With Get Committed®, you can go through most of the steps in the loan process to secure a loan commitment before you even make an offer on a home.

Plus, we are one of the only lenders to pre-approve borrowers with a soft credit check instead of a hard inquiry, which protects your credit score.

Apply for pre-approval today with Compass Mortgage to access our unique borrower benefits. 

We look forward to helping you find the most affordable loan option for your home.

Photo by Karolina Grabowska