South Dakota Savers: Planning is paramount to saving money on your mortgage

Erik Kaufman, The Daily Republic, Mitchell, S.D.
·6 min read

Jul. 27—A house is one of the largest purchases a family is likely ever going to make, and securing a loan to buy one can be a stressful, expensive undertaking.

But it doesn't have to be, according to a local mortgage loan specialist.

There are a number of steps a homebuyer can take to help minimize the impact of mortgage payments on their bottom line, said Reid Smith, a mortgage loan specialist with CorTrust Bank in Mitchell. That's more important for buyers now than in years past, with demand for homes high and the inventory low, homebuyers should be expecting to pay more than they would have otherwise.

"There are a lot more buyers than there is inventory. So purchasing is down because it's a seller's market right now," Smith told the Mitchell Republic in a recent interview. "(A seller) is getting $45,000 to $50,000 more on their house than they were in 2019."

While prices may be up, interest rates continue to hover at historic lows. Smith said CorTrust rates currently sit at about 2% on a 15-year mortgage, 2.625% on a 20-year mortgage and 2.75% on a 30-year mortgage.

That makes it a good time to borrow money, and with a little tweaking and preparation, homebuyers can maximize the impact their payments have to help keep them from overspending.

Securing pre-approval on a loan will let you know what you can get from your bank. That way you know what homes are in your price range, and if you're working with a realtor, they can focus on candidate homes within your price range instead of showing homes that may be out of financial reach for the buyer.

"The first thing a first-time or second-time homebuyer wants to do is contact your local lender and get pre-approved. If you're going to be working with a realtor, you want to know what you can afford," Smith said.

Smith also urged those applying for a loan to watch their debt-to-income ratio. If they're carrying a debt load, they should keep it below 50%.

Buyers can sometimes become blinded by focusing on the monthly payment. While they may be able to afford an extra $300 per month compared to what they are currently paying in rent per month, it's important to remember to factor that extra cost along with other regular monthly bills, such as groceries, gas and other necessities.

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"If you have a $100,000 loan and can drop it a full point, you're saving roughly $20,000 in interest alone through the life of the loan."

— Reid Smith, mortgage loan specialist with CorTrust Bank in Mitchell

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Looking down the road toward your family's future plans is also important, Smith said.

"First-time homebuyers, they don't always think about paying for gas and groceries every month," Smith said. "Some people come in and say they can afford this and this, but you don't necessarily want to do that because you don't want to be house poor. Or people will come in and say I don't have any auto payments, I don't have any student loans. But what about in two or three years down the road when you do have an auto payment?"

The terms of the loan also affect what a buyer will pay throughout the life of the loan. A 15-year loan will cost a buyer less than a 30-year loan over the long run, but the monthly payments will likely be higher, depending on the cost of the home and size of the loan.

Smith said he will sometimes encourage loan applicants to apply for a 30-year mortgage under some circumstances, such as if it's a young couple who may be planning to have children in the next few years.

"If they don't have kids yet but are expecting them down the road, I almost tell them to take a 30-year loan, but to pay more in principal if they can afford it, and then pay it off earlier than what the term of the loan is," Smith said.

For those who already have a mortgage, there are ways to cut back on costs, as well. Refinancing a mortgage to a lower interest rate is the most common method for doing this, Smith said, and it can make a big difference in what you pay over the life of the loan.

"The most common way to save money is by refinancing to a lower rate. If you can reduce your rate by a full point, it's worth doing," Smith said. "If you have a $100,000 loan and can drop it a full point, you're saving roughly $20,000 in interest alone through the life of the loan."

Refinancing is something that is often talked about, but customers are often startled by just how much it can affect their bottom line.

"It kind of blows your mind on how much you're saving," Smith said.

Making principal payments in addition to regular payments, even in small amounts, can also take the edge off a loan in the long run. Smith recommends doing this when you can and to watch for opportunities to pay off the principal, such as when you get a tax refund, a work bonus or an inheritance.

Those types of windfalls can make for a fun purchase or something special for the family, but regularly applying it to the principal of the loan can take years off the term. You can also switch from monthly regular payments to bi-weekly payments, which increases the number of full payments you make a year from 12 to 13, speeding up the payment process.

"It goes a long way. When you get a bonus, a lot of people will go out and buy something unnecessary, but one way to spend it is to put it right toward your principal," Smith said

Buyers may be tempted to pay off their loan in full in the event they come into a substantial sum of money. In some cases, that is a great idea. If your interest rate is around 4% or 5%, paying the loan off in full can make sense. But if you have a lower rate, putting the money you would have used to pay off the loan into mutual funds instead will likely generate more accrued interest than what your mortgage is costing you.

And there are other ways to make your mortgage work best for you. Smith recommends consolidating higher interest loans — an auto loan, for example — into a mortgage with a lower interest rate. That can save the consumer money by paying off the higher-interest loan with the lower-interest loan. He also recommends trying to put 20% down at the start of the loan and avoid private mortgage insurance where possible.

Perhaps most importantly, Smith said, is to try to stick with a local lender. Lenders inside the community know their clients, and they develop a sense of the needs and limitations of those customers. They are the ones that can answer the complicated questions, and they usually have an office you can stop by to talk about it.

"In working with a local lender, you always know if they're going to retire, or when they're going to retire. And customers get to know them and can trust them," Smith said.