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Practical Hacks for Saving Some Money on Your Mortgage

Owning your home is one of the smartest financial decisions you can make if you buy at the right price, in the right location, in a healthy market. Owning your home puts a roof over your head, you won’t have to worry about paying rent, and you get to live in the house while the value of the property continues to appreciate (hopefully). However, unless you have very deep pockets, you’ll most likely need to get a mortgage to finance the purchase of a home.

However, mortgage payments can put a massive strain on your finances if you happen to buy a house that costs more than you can easily afford. Yet, many people would rather stretch their finances to buy their dream home instead of living in a house in which they won’t be happy. If you want to buy a house and you are thinking of getting a mortgage, this article provides practical hacks that could help you shave some money off your mortgage.

Obtain your credit score

The very first thing you need to do before you start applying for a mortgage is to run a quick credit check to obtain your credit score. You’ll do well to obtain the FICO score because most lenders in the mortgage industry take the FICO score as gospel. Once you’ve obtained your FICO score you can easily know if you’ll be eligible for a mortgage or otherwise.

If you have excellent FICO score between 760 and 850, you’ll be a prime candidate for lenders and you application has great odds of being approved. If your FICO score is on the low end of the strata between 620 and 639, you’ll need to do a serious job in convincing the lender to approve you’re application.

Once armed with your FICO score, you can head over to FICO’s loan savings calculator to start crunching the numbers. The loan savings calculator shows how much you’ll pay in monthly payments and total interests if you fall into any of the six classes of credit score ranges.

Crunch the numbers

The image above shows my number crunching with the loan savings calculator. I crunched the numbers for a 30-year term loan with a fixed interest rate that won’t change throughout the term of the mortgage. I entered a loan principal amount of $200,000. From the image, I made the following observations;

• If you fall into the first FICO score range of 760 to 850, the loan attracts an interest rate of 3.28% APR. You’ll be required to make monthly payments of $874 each month and you’ll pay a total interest of $114,535 for the 30-year term of the mortgage.
• If you fall into the second FICO score range of 700 to 759, the loan attracts an interest rate of 3.502% APR. You’ll be required to make monthly payments of $898 each month and you’ll pay a total interest of $123,393 for the 30-year term of the mortgage.
• If you fall into the third FICO score range of 680 to 699, the loan attracts an interest rate of 3.679% APR. You’ll be required to make monthly payments of $918 each month and you’ll pay a total interest of $130,549 for the 30-year term of the mortgage.
• If you fall into the fourth FICO score range of 660 to 679, the loan attracts an interest rate of 3.893% APR. You’ll be required to make monthly payments of $943 each month and you’ll pay a total interest of $139,312 for the 30-year term of the mortgage.
• If you fall into the fifth FICO score range of 640 to 659, the loan attracts an interest rate of a massive 4.323% APR. You’ll be required to make monthly payments of $992 each month and you’ll pay a total interest of $157,280 for the 30-year term of the mortgage.
• If you fall into the last and lowest FICO score range of 620 to 639, the loan attracts a backbreaking interest rate of 4.869% APR. You’ll be required to make monthly payments of $1,058 each month and you’ll pay a total interest of $114,535 for the 30-year term of the mortgage.

Make a smart decision to raise your credit score

From the foregoing, you’ll only pay $114,535 as interest on a principal of $200,000 if you have excellent credit. Interestingly, your total interest will fall drop to $41,854 if you choose to repay the mortgage over a 15-year term. However, if you have the lowest credit score, you’ll pay $66,232 more in interest than someone with excellent credit score.

Hence, it is in your best interest to work on raising your credit score before you apply for a mortgage. In fact, it might be smarter to wait for a year to two to raise your credit score instead of rushing to apply for a mortgage and incurring a high interest rate. More so, the process of raising your credit score will teach you financial discipline which would help you to be in a better position to manage the mortgage and your finances going forward.

James Hendrickson

James is an internet entrepreneur, blogging junky, hunter and personal finance geek.  When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College.  He loves individual stocks, bonds and precious metals.