Owning a home is a significant milestone. One of the most important considerations is finding a mortgage payment that works with your financial situation. With some advance planning, you can enjoy the lowest monthly mortgage payment possible without sacrificing your lifestyle.
Discuss your loan options and term with your mortgage advisor is the first step. Here we’ll explore a few practical strategies to reduce your mortgage payment further.
The Price is Right
Before diving in, step back and review your overall financial picture. Verify what you can afford against your monthly income, expenses, and savings. If you haven’t run it already, the Homeownership Snapshot can help, and will keep your financial picture up-to-date using the most recent mortgage loan interest rate and information in your linked accounts. Together they can give you a clear understanding of what you can afford today.
But what if that figure doesn’t quite get you into a home in your preferred neighborhood? Well, you’ve got options. At the end of the day, the estimated monthly payment is based on two things – how much money you need to borrow, and how much it’ll cost you to borrow it. Which points to your two key ways to boost your purchasing power: borrow less (reduce your principal) or borrow cheaper (at a lower interest rate).
Consider Your Down Payment
A higher down payment means that you are already borrowing less, which will lower your monthly payment directly. If you put in a 5% down payment you have to borrow the other 95%, but if you save enough to put down 20% then you only need to borrow the remaining 80%. A higher down payment may also win you a lower interest rate, because the higher down payment gives a lender more confidence that you will be able pay back your loan. That better rate will reduce your total interest paid across the life of the loan, resulting in a lower monthly payment for you.
If home prices rise while you’re saving more to have a 20% down payment, that could impact your purchase power. Ask your mortgage advisor for a market update to see if the cost of waiting to save for a higher downpayment is worth it.
Improve Your Credit Score
A higher credit score can qualify you for better interest rates. Unless you are already north of 740, you’ve got room to reduce your payment as that’s the minimum score for the best pricing tier available from most lenders so before applying for a mortgage, work on improving your credit score by paying bills on time, reducing debt, and addressing any errors on your credit report. As a bonus, a higher credit score can help you obtain lower home insurance rate, too.
Avoid Private Mortgage Insurance (PMI), if possible
If your down payment is less than 20%, you might be required to pay PMI. However, some lenders offer options to avoid PMI, like lender-paid mortgage insurance or piggyback loans. If you’re in a situation where PMI is in play, make sure to explore these options to address this and potentially reduce your monthly payment.
Securing an affordable monthly mortgage payment requires careful planning. By following these strategies, you can position yourself to enjoy the lowest monthly payment and remember that once you’re in, you can always accelerate your repayment schedule to reduce your term and save on interest payments. Regardless of how you slice it, a well-planned mortgage not only brings you closer to homeownership, but also contributes to your long-term financial well-being.
