If you’re like most people, housing costs are your biggest expense. CBS News reported that U.S. rental prices hit a record high in 2018 at an average of $1,405 a month. On the flip side, Lending Tree reported that the average monthly mortgage cost was $1,029 in 2016.
Rent tends to rise with each move and without notice, even if you aren’t moving. But a mortgage on a home of your own stays the same, so you avoid those unexpected increases and avoid fluctuating housing expenses. And while buying a home can seem expensive, it can have advantages over renting, including the absence of fluctuations in housing costs and the potential return on your investment in a home of your own.
While a mortgage can seem daunting, there are ways to keep costs in line. One of those ways, that many people don’t consider is getting your mortgage online, which can actually save you money on your mortgage costs.
Why Get an Online Mortgage?
Managing your finances through your phone was almost unheard of a decade ago, but today it’s common and completing an online loan application is common. Online lender offer flexibility and convenience for home buyers. You can research mortgages, rates and terms when you have time and wherever you are. And comparison shopping helps you save a lot of money over the term of your home loan. You also:
- Save the time and gas money needed to travel to a lender’s office and meet face-to-face.
- Can possibly access lower interest rates and closing costs made possible by the competition between online lenders and between online and brick-and-mortar lenders.
- Take advantage of more lenient underwriting than offered by larger lenders—a particular plus if your credit score is lower than 700 or so.
- Have greater and more real-time visibility into the process and where you’re at within that process.
Online mortgage companies let you, the home buyer, easily manage your closing process by giving you control. You can watch your application as it goes through the process through the application portal. This lets you catch a problem before it upsets your timeline. When you’re missing a document, the online portal can let you know and even send you an email alert.
Online mortgage applications give you control and power over your mortgage. Mortgage calculators built into a lot of applications let you instantly see how small interest rate changes or different terms affect your mortgage. And because this information is available 24×7, you don’t have to wait to get answers when the lending company to be open during business hours.
Online mortgages also let you shop around for a home loan that fits your needs. Interest rates affect your loan much more than you realize. An interest rate that’s 0.25% lower can save you almost $5,000 over 30 years. Changing the term of the loan to 15 years saves you 50% savings in interest paid over the course of the loan.
Online mortgage lenders also often have less overhead than brick-and-mortar community banks. This lets them pass on savings to their customers through lower interest rates and fees. Applying to online lenders can also be simpler. You can upload digital documents instead of printing out copies to take to the lender’s office.
More Ways to Save on an Online Mortgage and an Offline Mortgage too
While a possible reduced interest rate with an online mortgage can reduce your loan payment, you can do other things to reduce it as well.
Private mortgage insurance (PMI) protects the lender in case you default. When you borrow more than 80% of the value of the home and get a conventional fixed-rate loan through a private lender, you’re required to take out PMI as part of your loan. PMI can add as much as 1% of your loan balance. On a loan balance of $150,000, that’s $1,500 per year or another $125 to your payment each month.
Having a down payment of 20% or more reduces your need for private mortgage insurance. To avoid PMI, choose a home that lets you make a down payment of at least 20%. Take the amount of your down payment and multiply by five to get the highest price you can pay to avoid PMI.
You can also consider these options:
- Military perks: Eligible veterans qualify for loans through certain programs with no money down and no monthly PMI. The Veterans Benefits Administration doesn’t provide loans, but it acts like a guarantor for a portion of the loan, which allows the lender to provide favorable terms on VA loans.
- Equity gifts: If you’re buying a family-owned property or one that you’ve rented, you may ask the family or landlord to gift you your equity in the home as a way to reduce the purchase price. This can save you money at closing and on PMI. Be prepared to provide documentation about your relationship and the equity gift. Lenders want to ensure that you’re not committing fraud.
- The 80/10/10 method: This is an old-school method of allowing the buyer to put down 10% of the purchase price of the home. The lender provides 80% financing through a first mortgage. The same lender, or even another lender, provide another 10% of the mortgage, which goes toward the down payment, eliminating the need for PMI. The method requires a credit score of at least 700.
- Negotiate with the seller to get a lower purchase price. Getting pre-qualified can help as it lets the seller know you’re serious. Ask for property discounts that reduce the loan amount, but not the home’s appraised value. This can get you closer to not having to pay for PMI.
If you’ve already purchased your home and are paying PMI, check your balance to see how close you are to getting your balance below 78%. Once you’ve paid down 78% of the home value toward your mortgage, PMI should automatically be canceled. But once you reach 80%, you can ask that it be canceled early. You may want to speed up your payments to get the PMI off your mortgage account. Or you may be able to refinance your home to drop the PMI requirement.
Before accepting a large gift to pay down your loan or make a down payment, check with your lender. Your loan program may regulate the amount of money you can receive from a family member. And, plan to document any large gift of money when buying a home.
Shop Around for Insurance
Home-owners insurance can be a big part of your mortgage payment or a big payment if you don’t have it wrapped into your mortgage amount. A policy that costs $2,000 annually adds about $166 to your monthly loan payment or expenses.
If insurance is part of your mortgage, the lender keeps these payments in an escrow account to pay the bill every year. Your lender may have minimum requirements for your insurance policy. Make sure that your insurance meets its criteria. Where you live will have a lot to do with the cost of your insurance, but saving $500 per year can reduce your mortgage payment by about $40 a month.
Make Extra Payments on Your Mortgage
You can pay your mortgage faster by making extra payments. You can make two payments that add up to the same amount you pay monthly to actually make 13 instead of 12 payments annually. You can make one extra payment a year separately. Or you can pay more than you’re required each month. You can also use a large gift, bonus or tax refund to make an extra payment on your mortgage.
The savings of any of these methods can add up. For example, on an $80,000 loan at 4.5% interest without PMI, making one extra payment each year by paying bi-weekly instead of monthly, the mortgage rate savings are over $11,000. Plus, you can pay off your mortgage about five years faster.
Find the Right Loan
Online mortgages make shopping for a home less stressful. Online mortgages provide more options for your budget. Credit.com offers online mortgage loans and resources to help you find the home of your dreams. If you’re buying your first home or downsizing for the next stage of your life, learn more about programs that will help you when shopping for a mortgage.
Your Credit Score Matters for Any Mortgage
Your credit report is one of the most important aspects of getting a mortgage. Borrowers with higher credit scores get better rates from lenders. And if you have poor credit or your credit score isn’t high enough, you may struggle to get approved for a mortgage.
- Correct errors to ensure accuracy.
- Pay down accounts that are close to the maximum limit and all balances in general.
- Negotiate old debts by settling them.
- Maintain a good credit utilization ratio; use no more than 30% of your available credit.
- Increase your credit card credit limits if possible and without then using any of that new limit.
- When you apply for a mortgage, don’t open any new credit accounts. Don’t make any big purchases until your mortgage loan closes.
- Apply for online mortgages from multiple lenders in a few weeks so that all applications are seen as a single hard inquiry.
Happy house hunting!