Once you start this process, you will think of many small items that fall into the category of unnecessary spending. Decide how many of these expenses could be cut back if needed and the total dollar amount you would save.
Now the important part, how this will benefit you. First, you must realize that most of this will have no effect on your loan application. Paying off your car or credit cards will, of course, be considered by your lender. The rest of it will have no bearing on the underwriting process. It will, however, put you in a better position to choose the right loan.
If, with a better budget and a little self-restraint, you could save $400 per month without making your life unbearable, what are your choices? If you are getting a fixed rate loan, can you afford a shorter term than thirty years? You will get a lower interest rate, pay less interest because of the higher payment, and have a home free and clear in less time. If you do not want the required higher payment, you know that you can make additional principal payments on a thirty-year loan of up to $400 per month. You will not save quite as much because your interest rate will be a little higher, but you will still both cut the amount of interest you pay and shorten the term.
Additional principal payments that benefit you the most are also the most difficult to make. This is because they are most beneficial early in the loan term, when you are paying interest on the highest amount of principal. This is also when you are spending money to make your new home just the way you want it to be. You may be adding or replacing furniture and appliances, getting new carpeting and drapes, and so on. There is usually very little left over for additional principal payments. If you get the shorter-term loan with the higher required payment, you may have to wait for that new dining room set, but you will save a lot of money. Also, if you decide that an adjustable loan is best for you, you know that you can make a payment increase of up to $400 per month if rates go up. If you choose a combination loan that is fixed for the first few years and then adjusts, you know that you can save $400 per month against the day when your payment may take a big jump. If your loan adjusts in five years, you will have a $24,000 cushion against the higher payment. That is not counting what you earn on the money. If rates go up, the amount could be $30,000 or more.
The final advantage is if you have some time before you need the loan. If you are planning to start looking for a home a year from now, you know how you can save an extra $4,800 ($400 x 12). This could be the money that pays the point to buy down your interest rate. The lower rate could make the difference between qualifying and being rejected for the loan that you want.
A fixed rate loan with a shorter term than thirty years is the single greatest money saver in a mortgage loan.
As you know, unless you take the shorter-term loan with the higher required payment, you will need to use some self-discipline. At least you will give yourself a chance that you probably would not have realized you had if you had not gone through this process.