8 Ways to Reduce Costs and Save Money When Buying a Home

The 2024 FHA Loan Handbook

Home buyers are always looking for ways to reduce their costs. And that’s understandable, when you consider that the upfront costs alone can add up to thousands of dollars.

This guide explains some of the ways you could save money, reduce out-of-pocket expenses, and pay less interest over the life of your loan.

1. Consider Using Discount Points

Mortgage discount points require you to pay more money up front, at closing. But they can help you save a significant amount of money over time.

A “discount point” is a form of prepaid interest. The idea here is to pay a little more money at closing in exchange for a lower interest rate.

One point will cost you 1% of the loan amount and could lower your interest rate by around 0.25% (but this can vary). Discount points help you save money over the life of the loan by reducing total interest costs.

This strategy works best for people who plan to stay in the home (and keep the loan) for a fairly long time, typically more than five years. Over time, you will pass the “breakeven point,” where your accumulated monthly savings begin to surpass the amount you paid in points.

Start by asking your mortgage lender if discount points are available in your situation. Your lender can show you multiple scenarios (with and without points) so you can see how it will affect your monthly payment and total interest costs.

They can also tell you when you would reach the breakeven stage based on the different scenarios. This is important, because if you plan to move again before reaching the breakeven, there’s really no point in paying points.

2. Improve Your Credit Score

Home buyers with higher credit scores tend to qualify for lower (better) mortgage rates, while those with lower scores often get charged more in interest.

By improving your credit score, you could potentially:

  • Qualify for a lower mortgage rate
  • Reduce the size of your monthly payments
  • Reduce your total interest costs
  • Save thousands of dollars over the long term

The mortgage rate is a percentage of the total loan amount, which is usually a large sum of money. So anything you can do to reduce the rate could help you save money.

3. Explore Down Payment Assistance Programs

Down payment assistance programs (DAPs) can help cash-strapped home buyers overcome the upfront costs associated with a home purchase. These programs are typically offered by state and local governments, nonprofits, housing agencies, and employers.

Down payment assistance can take many forms but usually involves either a grant, a forgivable loan, or a low-interest loan. They’re usually geared toward specific types of buyers, such as first-time home buyers or those with low to moderate income.

Common types of down payment assistance include:

  • Grants: Free money that never has to be repaid. Grants aren’t as common as they used to be, but they still exist. They’re usually provided by local housing agencies, often in collaboration with non-profit groups.
  • Loans: Down payment assistance can also come in the form of a low-interest or no-interest loan, which can be paid back over time.
  • Deferred loans: A second mortgage with deferred payments that only have to be paid when you move, sell, or refinance the home.
  • Forgivable loans: A second mortgage that can be forgiven (erased) over a set number of years, with the homeowner making regular payments in the meantime.

These and similar programs help home buyers reduce their out-of-pocket costs on the front end, by reducing or eliminating the need for a down payment.

4. Ask for Seller Concessions

Home buyers can also reduce their upfront costs by requesting contributions (money) from the seller. Just be sure to consider local housing market conditions before pursing this strategy.

A seller concession or contribution occurs when a seller agrees to cover some of the home buyer’s closing costs. These costs include things like mortgage origination fees, title insurance, and prepaid property taxes.

If you can negotiate a seller concession, it will reduce the amount of cash you have to pay at closing. Even a 3% concession could put thousands of dollars back into your pocket.

You can include a request for seller concessions in the purchase agreement, when you first make an offer to buy a home. But ask your real estate agent if it’s wise to make such a request in your situation. In a hot market, it might be risky to ask too much from the seller.

5. Negotiate the Sale Price with the Seller

Depending on the seller’s initial asking price and local market conditions, you might be able to negotiate the sale price downward. If you’re using a mortgage loan, a lower sale price would reduce the size of your down payment as well as the monthly payments.

Before making an offer on a house, research comparable sales (“comps”) in the area where you are planning to buy. This will show you what similar homes are selling for and help you determine a fair offer price. It can also help you avoid overpaying.

6. Choose the Right Loan Term

The “loan term” refers to the length of time you have to repay the mortgage loan. Common loan terms for home loans include 30 years, 20 years, and 15 years.

Choose a term that works best for your financial situation and budget. This is something that can vary from one home buyer to the next, based on priorities.

  • Home buyers who are mostly concerned with minimizing their total interest costs might choose a 15-year term instead of the more popular 30-year option. (A shorter term means less overall interest).
  • Home buyers who want to minimize their monthly payments might opt for the 30-year loan term to spread those payments out over a longer period of time.

The goal here is to choose a loan term that supports your long-term financial goals.

7. Consider an Adjustable-Rate Mortgage (ARM)

You could also use an ARM loan to reduce your home buying costs, by securing a lower interest rate for the first few years.

An adjustable-rate mortgage (ARM) has an interest rate that can change periodically, usually after a fixed introductory period. For example, a 5/1 ARM loan holds a fixed and unchanging interest rate for the first five years, and then adjusts once per year after that.

ARM loans might appeal to home buyers who plan to sell or refinance their homes before the initial fixed-rate period ends. This strategy allows you to save money during the first years of homeownership, while avoiding the longer-term uncertainty of a changing interest rate.

ARM loans aren’t for everyone. The 30-year fixed-rate mortgage is the most popular loan option because it offers the most stability. But for those buyers who are looking for ways to reduce costs and save money in the short term, adjustable mortgages can be a good fit.

8. Customize Your Home Insurance

Home insurance provides financial protection against losses and damages to your house and personal belongings. But the cost of homeowners insurance can vary significantly based on the company you choose and the amount of coverage.

Obtaining home insurance quotes from multiple insurers allows you to compare coverage options, deductibles, and premiums to find the best value.

You could also save money by bundling home insurance with other policies, such as auto insurance. Insurers often provide discounts for their existing customers who add another policy.

Lastly, consider raising your deductible amount in order to secure a lower premium. The deductible is the amount you pay out of pocket before your insurance kicks in (in the event of a claim). The premium is the amount you pay each month just to have insurance.

According to the Insurance Information Institute: “Nowadays, most insurance companies recommend a deductible of at least $500. If you can afford to raise your deductible to $1,000, you may save as much as 25 percent.”

Choosing a Strategy Based on Your Goals

Not all of these cost-reducing strategies will apply to your situation. Different home buyers and homeowners have different goals and unique financial circumstances.

For instance, purchasing discount points to lower the interest rate can reduce total interest costs over the long term, but it requires more money upfront. Borrowers with limited funds might not be able to afford discount points, making this strategy less practical.

Think about your financial situation, housing goals, and priorities. This will help you determine which money-saving strategies might work for you—and which ones to avoid.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author

The 2024 FHA Loan Handbook