Reduce Home Loan Interest in 2024: 7 Essential Tips

Reduce Home Loan Interest in 2024: 7 Essential Tips

Reduce Home Loan Interest in 2024


Getting a home loan is often necessary to be able to afford your dream home. However, the interest payments on home loans can really add up over time. The good news is that there are things you can do to reduce your interest rate and save money on your mortgage.

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In this comprehensive guide, we will provide 7 essential tips to help you minimize your home loan interest in 2024. Learning how to lower your rate can result in significant savings and make homeownership more affordable.

Tip #1: Improve Your Credit Score

One of the main factors lenders use to determine your mortgage interest rate is your credit score. The higher your score, the lower the rate you can qualify for.

Here are some effective ways to boost your credit score before applying for a home loan:

  • Pay bills on time. Payment history makes up a major part of your score. Set up autopay, and calendar alerts and minimize late payments.
  • Lower credit utilization. Don’t max out credit cards. Experts recommend keeping utilization under 30%.
  • Avoid applying for new credit before getting a mortgage. New inquiries can lower your score temporarily.
  • Correct errors on your credit report. Dispute any inaccuracies with the credit bureaus. Mistakes could be lowering your score.

Improving your credit score by even 50-100 points could mean getting approved for a significantly better home loan rate.

Tip #2: Provide a Larger Down Payment

The size of your down payment affects your loan-to-value ratio (LTV), which in turn impacts your interest rate. The lower your LTV, the less risky a borrower you are to lenders.

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To get the lowest rate:

  • Put at least 20% down to avoid paying private mortgage insurance (PMI)
  • Consider putting down more than 20%, even if just a few percentage points
  • This will get you into a lower LTV bucket for the most favorable pricing

The savings from lowering your rate by half a percentage point or more could mean tens of thousands in interest savings over the life of your loan.

Tip #3: Choose the Right Mortgage Term

Mortgages come in different term lengths, with the most popular options being 15 and 30 years. The shorter the term, the lower the interest rate will typically be.

Here’s how to find the ideal term length:

  • 30-year mortgages mean lower monthly payments but paying more total interest over time
  • 15-year loans have higher monthly costs but save substantially on total interest paid

Do the math to determine monthly payments at both rates. While 15 years have higher payments, see if budgeting allows you to handle the increase. Locking at a lower rate for 15 years could make sense long-term.

Tip #4: Make Extra Mortgage Payments

One effective way to pay off your mortgage faster and drastically reduce the total interest paid is to make additional principal payments each month. There are two easy ways to do this:

  1. Pay half the regular monthly payment every two weeks instead of one full payment per month. This essentially gives you an extra monthly payment per year.
  2. Add any extra funds directly to the principal once a month or whenever possible. Even an extra $100 per month can shave years of payments.

Consult an amortization schedule calculator to see exactly how much extra payments can accelerate payoff timelines and interest savings.

Tip #5: Refinance Your Mortgage

Once you’ve had your home loan for at least a couple years, look into refinancing if interest rates have dropped significantly since you obtained your loan. Refinancing to a lower rate can really pay off.

Here are 3 steps for effective refinancing:

  1. Check current rates – Compare today’s average rates vs your existing rate and calculate savings. Target at least a 0.5-1% drop to make it worthwhile after covering closing costs. Use a refinance calculator to estimate savings.
  2. Increase term length – For example, switching from a 15 to 30-year loan could dramatically decrease your monthly payment, even after lowering your rate through refinancing. This keeps payments affordable while still saving on interest.
  3. Use cost savings to pay the loan faster – Take all or a portion of the monthly savings from refinancing at a lower payment and put it towards paying your new loan down faster as an extra principal payment. This saves interest over the long run.

Follow these best practices for refinancing and you could save $20k+ over your loan’s duration. Tracking market rate movements is key for recognizing refi opportunities.

Tip #6: Make Interest Payments Tax Deductible

The interest portion of your monthly home loan payment is tax deductible up to certain limits if you qualify. This deduction gets accounted for when you file your yearly tax return and can lower your tax liability to save you money each year.

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Here’s what homeowners need to know:

  • Itemized deductions must exceed the standard deduction to qualify
  • Interest can be deducted on up to $750k of loans taken after Dec 15, 2017
  • Interest on home equity loans and HELOCs also qualify with limitations

Consult a tax professional to understand if claiming your mortgage interest payments as a tax deduction makes financial sense based on your individual tax situation.

Tip #7: Shop Multiple Lenders

Today’s mortgage market is highly competitive. The exact same loan type, down payment, and term can actually yield different interest rates across various lenders.

Here’s how getting multiple rate quotes can score you the lowest rate:

  • Check published average rates – Compare the rate deals you are quoted versus the prevailing national average for your situation as a baseline.
  • Apply with 3+ lenders – Complete full loan applications with several lenders within a short period to minimize credit check impacts.
  • Negotiate for the best deal – Share the best offer you received with the other lenders and give them a chance to beat it.

It takes a little extra effort, but shopping around with multiple mortgage lenders can result in real savings. Once you determine the best offer, lock it in quickly before rates change.

Frequently Asked Questions

Still, have some questions about reducing home loan interest? Here we answer some of the most common queries:

How much can I expect my interest rate to drop by improving my credit score?

* It depends on your starting score, but typically expect a 0.5 to 1 percentage point decrease for every 100 to 150 point increase. Going from 650 to 800 could lower your rate by around 1.5%.

What’s the benefit of paying discount points upfront to lower my rate?

* Paying discount points allows you to “buy down” your rate, usually around 0.25 to 0.5% per point paid. Do the math to see if spending 1 point upfront to get a 0.5% better rate makes sense for how long you plan to keep the home.

Should I pay off PMI early or focus extra payments on the mortgage principal?

* Many experts suggest putting extra funds directly toward the principal, not prepaying PMI. Paying down the loan faster builds equity to cancel PMI while also reducing your total interest paid over the long run.

Let us know if you have any other questions in the comments!

Conclusion

Finding ways to decrease your home loan interest rate and payments allows you to maximize savings while managing the large investment that is homeownership.

Implement as many smart tips and strategies from this guide as possible when financing your home to minimize interest costs over the coming years. A little effort upfront can mean tens of thousands of dollars in home loan interest paid.

Getting preapproved early allows you to shop for better rates and secure favorable financing terms to purchase your dream home. Use these 7 essential tactics to reduce interest and accelerate payoff timelines when planning for a home loan in 2024.

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