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What Home Loans Can You Get If You Have a Low Income?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Transitioning from renting to owning a place of your own can seem like the impossible dream rather than the American dream, especially when home prices today are among the highest ever recorded.

Thankfully, there are options for those who want to buy but don’t have the income to qualify for a conventional loan.

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Home loans for low-income borrowers

Government-backed loans can provide a path to homeownership for buyers who thought their low income would keep them in a rental forever. “Government-backed loans generally have more-accommodating income requirements,” said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. “A lot of people don’t realize how many different types of programs are available.”

FHA loans

Federal Housing Authority (FHA) loans are among the most lenient in terms of income, credit and down payment requirements. In fact, FHA loans do not have a minimum income requirement — however, there are income-related conditions borrowers must meet.

Income requirements — Lenders will typically verify two years’ employment and analyze borrowers’ income expectations for the next three years. Part-time work and gaps for seasonal work, military deployment and education may be considered, with documentation. Other sources of income, including overtime and bonuses, may be used to help buyers qualify.
Down payment — The minimum down payment is 3.5%, which can come from a gift from relatives, an employer, an approved charitable group or a government homebuyer program.
Minimum credit score — Borrowers can have a credit score as low as 500 with 10% down; with 3.5% down, the minimum score is 580. Applicants without a credit history may qualify by meeting stricter underwriting guidelines.
Debt to income (DTI) — The maximum DTI ratio, which is calculated by dividing your debt by your income, is generally 31% of the borrower’s monthly housing commitment and 43% of all monthly debts.

Additional advantages

FHA loans are available on one- to four-unit properties, mobile homes and factory-built housing.

Downsides

FHA loans require an upfront mortgage insurance premium (MIP) equal to 1.75% of the loan amount and ongoing mortgage insurance with less than 20% down. Unlike some other government-backed loans, mortgage insurance is not cancellable; borrowers will have to refinance to get rid of it.

HomeReady

HomeReady® is a loan from Fannie Mae that offers financing for low-income buyers. With one of the lowest down payments available and flexible income requirements, it may be good choice for those who don’t need an FHA loan for credit score reasons.

Income requirements — There is no limit on properties located in low-income areas, which you can find on the U.S. Housing and Urban Development (HUD) site.
For all other homes, borrowers must be at 100% of the area’s median income.
Payments from a rental property can be counted as income, and non-occupying co-borrowers (such as parents) can also boost a borrower’s qualification potential.
Down payment — This loan requires a minimum of 3% down. Funds can come from outside sources, including gifts and grants.
Minimum credit score — Borrowers can have a credit score as low as 620; however, rates are typically better for a score of 680 and up.
DTI — HomeReady’s maximum DTI is 45%; the DTI can go higher if additional household income is used.

Other advantages

  • Financing can go up to 97% of loan-to-value (LTV) on a single-family home.
  • This loan can also be used for one- to four-unit primary residences and manufactured housing.
  • Borrowers can cancel their mortgage insurance once their home equity reaches 20%.

Potential downsides

  • Minimum credit scores are higher than for FHA loans.
  • This loan requires at least one of the borrowers to complete an online housing education program.

HomePossible loans

The Freddie Mac HomePossible® mortgage offers down payments as low as 3% for very low- to moderate-income homebuyers. The unique aspect of this loan is that it offers borrowers the option of applying sweat equity to their down payment and closing costs, which could result in a $0 move-in.

Income requirements — There are no income requirements for properties in low-income census tracts; in other areas, borrowers’ income is capped at 100% of the Area Median Income (AMI). Applicants also can use the income from a non-occupying co-borrower and rental income to qualify.
Down payment — The minimum down payment is 3%, which can come from family, employer-assistance programs, secondary financing and sweat equity.
Minimum credit score — There is no minimum credit score, as long as other eligibility requirements, such as verifiable housing payments, are met.
DTI/LTV — DTI can be as high as 50%. Maximum LTV is 97% for a one-unit primary residence and 95% on two- to four-unit primary residences and manufactured homes.

Other advantages

  • There is no upfront mortgage insurance fee, and private mortgage insurance (PMI) can be canceled once the LTV is below 80%. Insurance coverage costs are also reduced for LTVs above 90%.
  • A variety of loan options are available, including 15- and 30-year fixed-rate mortgages and adjustable-rate loans.

Downsides

  • Qualification requirements and loan limits may be stricter than for FHA loans.
  • Borrowers are required to take housing counseling courses to boost financial literacy.

USDA Single-Family Housing Direct Home Loans

This program from the U.S. Department of Agriculture (USDA) can help those with very low income purchase a home with a minimal down payment and subsidies that further reduce monthly payments. Payment assistance can drop interest rates to as low as 1%. The residence being purchased must meet eligibility requirements as being in a rural area.

“There is a simple tool on the USDA website where you can figure out if an area you’re considering is eligible,” said Kapfidze. “There are a lot of small towns and even some suburban areas that meet the standard. It’s a broader program than people realize.”

With the USDA direct loan, the USDA is the lender and loans are for up to 33 years, or 38 years for very low-income borrowers.

Income requirements — The USDA adheres to strict income requirements for single-family direct home loans, with eligibility based on the area’s adjusted income limits. The income limit must be met by all members of the household, and borrowers must “demonstrate a willingness and ability to repay debt,” per HUD.
Down payment — There is no down payment required unless the borrower has more than $15,000 (or $20,000 for elderly) in non-retirement assets; in this case, the borrower may be required to direct funds toward the home purchase.
Minimum credit score — A minimum 640 credit score is required; however, borrowers with federal judgments will not be able to secure financing with any score. Alternative credit such as rent and utility bills may be used for applicants with limited or nonexistent credit scores.
DTI — The principal, interest, property taxes and insurance (PITI) are capped at 29% of very low-income borrowers’ income, and 33% for low-income borrowers. DTI is limited to 41%, regardless of income.

Other advantages

  • There is no PMI on these loans.
  • Down payment funds can come from multiple sources including gifts, grants, tax credits and seller concessions.
  • Borrowers are required to pay a $25 credit report fee, but all other fees can be rolled into the loan.

Potential downsides

  • While the USDA’s payment assistance can make the mortgage payment more affordable, borrowers are required to repay the subsidy once they transfer title or no longer occupy the property.
  • Borrowers must “be without decent, safe and sanitary housing” and “be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to meet,” per HUD.
  • The property must be located in a rural area, must generally be under 2,000 square feet and with a market value below the area loan limit and must not be an income-producing structure.
  • Attending a Homebuyers Education and Counseling class is also required for first-time homebuyers.

USDA Single-Family Housing Guaranteed Loan program

The USDA’s Single-Family Housing Guaranteed Loan program is similar in many ways to the Single-Family Housing Direct Home Loans program. There is no down payment requirement, minimum credit score and DTI are the same, as well as the option to get down payment funds from multiple sources. There are a few key differences, however:

  • Moderate income is allowed. You can find limits here.
  • There are no subsidies.
  • Loan terms can be 15 or 30 years.
  • There is no maximum loan amount or square-footage limit.
  • The guaranteed loan is funded by private lenders and backed by the USDA.

Potential downsides

With income limits and no subsidies, borrowers may find it more difficult to qualify for this loan. In addition, there is a one-time mortgage insurance fee (1% currently) and an annual fee of 0.35%.

U.S. Department of Veterans Affairs (VA) guaranteed loans

VA guaranteed loans are intended to make homeownership affordable for military service members, veterans and surviving spouses who meet eligibility requirements. These loans offer some of the most favorable terms industrywide, with no down payment and with interest rates that can be be lower than FHA and conventional rates, but borrowers will need a Certificate of Eligibility (COE) to confirm they meet the VA’s terms.

Income requirements — There is no specific income requirement other than to ensure that veteran borrowers can afford the loan.
Down payment — VA-guaranteed loans provide 100% financing.
Minimum credit score — There is no minimum credit score for a guaranteed loan. The VA requires approved lenders to consider an applicant’s entire loan profile, and individual lenders may apply their own credit score requirements.
DTI — There is no maximum debt-to-income ratio, however, borrowers with a total DTI ratio over 41% may have stricter terms.

Other advantages

  • There is no mortgage insurance on VA loans.
  • The VA has a one-time VA funding fee that varies depending on the type of service, the type of loan and the down payment. It can be rolled into the loan and those who are receiving disability compensation do not pay the fee.
  • Loan holders have access to regional loan technicians who may be able to help veterans avoid foreclosure should they become delinquent.

Potential downsides

The one-time fee can be more than borrowers are comfortable paying and is higher for Reservists and members of the National Guard.

More tips for buying a home when you have a low income
The first step in any homebuying process is to check your credit score so you know what to expect — and what to work on. Credit scores generally range from 300 to 850, and while you don’t need a high credit score (or any score at all) for every low-income loan, a better score may yield lower rates or improve approval odds.

Down payment assistance

There are a variety of national and local programs that can help low-income homebuyers with their down payment, including the American Dream Downpayment Initiative, which provides grants to first-time buyers with household incomes below 80% of the median in their area. You can also search HUD for state-by-state down payment assistance programs.

“Down payments are the biggest obstacle to homeownership for many,” said Kapfidze. “If someone solves that problem for you, you’re halfway there.”

Talk to a housing counselor

The Consumer Finance Protection Bureau (CFPB) has a list of HUD-approved counseling agencies across the country that can provide advice on different mortgages and help find the best option for your circumstances. Working with a housing counselor may be free of charge.

Figure out your budget

When you pre-qualify for your loan, your lender will let you know the maximum amount you can spend on a home. But what you are comfortable paying every month may be different. Creating a detailed budget that outlines all current expenses — and those you may be able to predict in the near future — can help you figure out just how much home you’re OK with purchasing.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jaymi Naciri
Jaymi Naciri |

Jaymi Naciri is a writer at MagnifyMoney. You can email Jaymi here

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Mortgage

Should You Save for Retirement or Pay Down Your Mortgage?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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On the list of financial priorities, which comes first — paying off your mortgage or saving for retirement? The answer isn’t simple. On one hand, owning a home with no mortgage attached to it provides long term security knowing you’ll have a place to live with no monthly payment except property taxes and insurance. However, you’ll also need income to live on if you plan to retire, and how much you save now will have a big impact on your quality of retirement life.

We’ll discuss the pros and cons of whether you should save for retirement or pay down your mortgage, or maybe a combination of both.

Pros of paying down your mortgage vs. saving for retirement

The faster you pay your mortgage off, the sooner you own the home outright. However, there are other benefits you’ll realize if you take extra measures to pay your loan balance off faster.

You could save thousands in long-term interest charges

Most homeowners take out a 30-year mortgage to keep their monthly payments as low as possible. The price for that affordable payment is a big bill for interest charged over the 360 payments you’ll make if you’re in your “forever” home.

For example, a 30-year fixed $200,000 loan at 4.375% comes with a lifetime interest charge of $159,485.39. That’s if you never pay a penny more than your fixed mortgage payment for that 30-year period. Using additional funds to pay down your mortgage faster can significantly reduce this.

Even one extra payment a year results in $27,216.79 in interest savings on the loan we mentioned above. An added bonus is that you’ll be able to throw your mortgage-free party four years and five months sooner.

You’ll build equity much faster

Thanks to a beautiful thing called amortization, lenders make sure the majority of your monthly mortgage payment goes toward interest rather than principal in the beginning of your loan term. Because of that, it’s difficult to make a real dent in your loan principal for many years. You can, however, counteract this by making additional payments on your mortgage and telling the lender to specifically put those payments toward your principal balance instead of interest.

Not only do you pay less interest over the long haul with this strategy, but you build the amount of equity you have in your home much faster. And to homeowners, equity is gold — you’re closer to owning your home outright, and equity can also be a resource if you need funds for a home improvement project or another big expense.

You can access that equity as your financial needs change by doing a cash-out refinance or by taking out a home equity loan or home equity line of credit (HEL or HELOC).

You won’t lose your home if values drop

When you contribute extra money into a retirement account, there is always the risk that you’ll lose some or all of the money you invested. When you contribute money to paying off your mortgage, even if the values drop, you still have the security of a place to live, and are increasing the equity in the home, no matter how much it’s ultimately worth.

Making extra payments ensures you’ll eventually have a debt-free asset that provides shelter to you and your family, regardless of what happens to the housing market in your neighborhood.

Cons of paying down your mortgage vs. saving for retirement

There are some cases where paying down your mortgage faster might actually hurt you financially. Before adding extra principal to your mortgage payments, you’ll want to make sure you aren’t doing damage to your financial outlook with an extra contribution toward your mortgage payoff.

You might end up paying more in taxes

The higher interest payments you make during the early years of your mortgage can act as a tax benefit, so paying the balance down faster could actually result in you owning more in federal taxes. If you are in a higher tax bracket in the early (first 10 years) of your mortgage repayment schedule, it may make sense to focus extra funds on retirement savings, and let your mortgage interest deduction work for you. Of course, everyone’s tax situation is different, so you’ll have to decide (with help from an accountant ideally) if it makes sense to itemize your taxes in order to claim mortgage interest payments as a deduction.

You won’t get to enjoy the return on your paydown dollars until you sell

The only real benchmark for figuring out the value of paying down your mortgage is to look at how much equity you’re gaining over time. However, the equity doesn’t become a tangible profit until you actually sell your home. And the costs of a sale can take a big bite out of your equity because sellers usually pay the real estate agent fees.

Home equity is harder to access

The only way to access the equity you’ve built up is to borrow against it, or sell your home. Borrowing against equity often requires proof of income, assets and credit to confirm you meet the approval requirements for each equity loan option. If you fall on hard financial times due to a job loss, or are unable to pay your bills and your credit scores drop substantially, you may not be able to access your equity.

Pros of saving for retirement vs. paying down your mortgage

Depending on your financial situation and savings habits, it may be better to add extra funds monthly to your retirement account than to pay down your mortgage. Here are a few reasons why.

You may earn a higher return on dollars invested in retirement funds

The growth rate for a stock portfolio has consistently returned more than housing price returns. The average return in the benchmark S&P stock fund is 6.595% for funds invested from the beginning of 1900 to present, while home values have increased just 0.1% per year after accounting for inflation during that same time period.

Assuming your portfolio at least earns 7%, if you consistently invest your money into a balanced investment portfolio, you can expect to double your money every 10 years. There aren’t many housing markets that can promise that kind of growth.

Retirement funds are generally easier to access than home equity

Retirement funds often give you a variety of options for each access, with no income or credit verification requirements, and only sufficient proof of enough funds in your account to pay it back over time. For example, a 401k loan through the company you work for will just require you to have enough vested to support the loan request, and sufficient funds left over to pay it off over a reasonable time.

Just be cautious about making a 401k withdrawal, which is treated totally differently than a loan. You aren’t expected to pay it back like you would a 401k loan, but you could get hit with taxes and penalties.

Cons of saving for retirement vs. paying down your mortgage

You’ll need to weather the ups and downs of the market

Most people who have invested money in the stock market or tracked the performance of their 401k over decades have stories about periods when the value of those investments dropped substantially. While the 7% return on investment is a reliable long term indicator how much your retirement fund might earn, the path to that return is hardly linear.

For example, if you were considering retirement between 1999 and 2002, you may have had to delay those plans when the S & P plummeted over 23% in value in 2002. If you look at each 10-year period since the 1930s, every decade has been characterized by periods of ups and downs.

Calculating the benefit of paying down your mortgage vs. saving for retirement

If you’re torn as to what to do with that extra cash or windfall, let’s look at an example of someone who has an extra $200 to put into either their nest egg or their mortgage each month for the next 30 years.

For this scenario, we’re going to assume their retirement account earns an average 7% rate of return and that their mortgage loan balance is $200,000.

Here’s how much they’d save:

Savings From Paying $200 per Month Down on Your Mortgage
Years PaidMortgage Interest SavingsExtra Equity in HomeTotal Interest Savings and Equity Built Up
10 years$6,040$30,039$36,079
20 years$28,529$76,529$105,058
22 years 6 months$50,745$200,000$250,745

One thing you may notice about the mortgage savings chart — it includes how much extra equity you’re building. Often only the mortgage interest savings is cited when people look at how much you save with extra payments, but that ignores the fact that you’re building equity in your home much faster as well. So not only do you save over $50,000 in interest with your extra contribution, you replenish $150,000 of equity that was used up by your mortgage balance.

As you can see, adding that extra $200 to their mortgage principal each month saved them about $200,000 in the long haul — but the real savings don’t stop there.

By adding an extra $200 to their mortgage payment each month, this borrower turned their 30-year loan into a 22-and-a-half year loan and became mortgage debt-free seven years faster.

That means, in addition to saving $50,000 in interest savings and gaining $200,000 of equity, they also no longer have a mortgage payment. That frees up $998.57 per month that they can now use as discretionary income. That’s an extra $89,871 they could potentially save over that 7.5 year period.

When you add that to the $250,745.41 they saved on mortgage interest and earned in home equity, they’re looking at a total savings of $340,616.

That gives the mortgage paydown a $54,000 net positive edge over saving that extra $200 for retirement, as you can see in the table below.

Savings From Contributing $200 per Month to a Retirement Fund
Years PaidRetirement Balance
10 years$34,404
20 years$102,081
30 years$235,212

The one caveat for this retirement calculation is we assumed the saver was starting at a $0 investment balance. If they already had a healthy balance in their nest egg, they might actually come out in better shape than paying down their mortgage.

There are clearly benefits to each option, and you should consider running your own calculations with your real numbers to get the best answer for yourself.

Paying down your mortgage and saving for retirement at the same time

There’s a fair case to be made for both paying down your mortgage and saving more for retirement, but why choose? If you’re somewhat on track with your retirement savings goals, and like the idea of having your mortgage paid off quicker, you could allocate a certain amount to each.

Pick a number you feel comfortable paying to your principal every month, and then to your 401k, and put it on autopilot for a year. Any time your income increases, or you get bonuses, divide up the amount between principal pay down and retirement additions.

Let’s look at what happens if you evenly divide up your $200 per month between investing your retirement and paying down your mortgage. We’ll use the same $200,000 loan at 4.375% referenced above, and look at the lifetime results.

Savings From Paying $100 Down on Your Mortgage Until Paid Off
Years PaidInterest SavingsExtra Home EquityTotal Interest Savings and Equity Built Up
10 years$3,020$15,020$18,040
20 years$14,265$38,265$52,350
25 years$30,534$200,000$230,534
Savings From Contributing $100 to a Retirement Fund for 30 Years
Years PaidRetirement Balance
10 years$17,202
20 years$51,401
30 years$117,607

Balancing the $100 investment in both strategies still yields a six-figure retirement balance after 30 decades, a debt-free house after 26 years, and shaves off $30,000 in mortgage interest expense. If you don’t like putting all your eggs into one financial basket, this may balance the risks and rewards of each option.

Final thoughts

Looking at the short term and the long term may provide you with the best framework for making a good decision about how to spend dollars on retirement versus extra mortgage payments. Be wary of any financial professional that tells you one path is absolutely better than another.

Having a stable source of affordable shelter is equally as important as having enough income to live when you retire, so a balanced approach to paying down your mortgage and savings for retirement may help you accomplish both goals.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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Life Events, Mortgage

What Is Mortgage Amortization?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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One of the biggest advantages of homeownership versus renting is each mortgage payment gradually pays off your mortgage and builds equity in your home. The difference between your home’s value and the balance of your loan is home equity, and your equity grows with each payment because of mortgage amortization.

Understanding mortgage amortization can help you set financial goals to pay off your home faster or evaluate whether you should refinance.

What is mortgage amortization?

Mortgage amortization is the process of paying off your loan balance in equal installments over a set period. The interest you pay is based on the balance of your loan (your principal). When you begin your payment schedule, you pay much more interest than principal.

As time goes on, you eventually pay more principal than interest — until your loan is paid off.

How mortgage amortization works

Understanding mortgage amortization starts with how monthly mortgage payments are applied each month to the principal and interest owed on your mortgage. There are two calculations that occur every month.

The first involves how much interest you’ll need to pay. This is based on the amount you borrowed when you took out your loan. It is adjusted each month as your balance drops from the payments you make.

The second calculation is how much principal you are paying. It is based on the interest rate you locked in and agreed to repay over a set period (the most popular being 30 years).

If you’re a math whiz, here’s how the formula looks before you start inputting numbers.

Fortunately, mortgage calculators do all the heavy mathematical lifting for you. The graphic below shows the difference between the first year and 15th year of principal and interest payments on a 30-year fixed loan of $200,000 at a rate of 4.375%.

For the first year, the amount of interest that is paid is more than double the principal, slowly dropping as the principal balance drops. However, by the 15th year, principal payments outpace interest, and you start building equity at a much more rapid pace.

How understanding mortgage amortization can help financially

An important aspect of mortgage amortization is that you can change the total amount of interest you pay — or how fast you pay down the balance — by making extra payments over the life of the loan or refinancing to a lower rate or term. You aren’t obligated to follow the 30-year schedule laid out in your amortization schedule.

Here are some financial objectives, using LendingTree mortgage calculators, that you can accomplish with mortgage amortization. (Note that MagnifyMoney is owned by LendingTree.)

Lower rate can save thousands in interest

If mortgage rates have dropped since you purchased your home, you might consider refinancing. Some financial advisors may recommend refinancing only if you can save 1% on your rate. However, this may not be good advice if you plan on staying in your home for a long time. The example below shows the monthly savings from 5% to 4.5% on a $200,000, 30-year fixed loan, assuming you closed on your current loan in January 2019.

Assuming you took out the mortgage in January 2019 at 5%, refinancing to a rate of 4.5% only saves $69 a month. However, over 30 years, the total savings is $68,364 in interest. If you’re living in your forever home, that half-percent savings adds up significantly.

Extra payment can help build equity, pay off loan faster

The amount of interest you pay every month on a loan is a direct result of your loan balance. If you reduce your loan balance with even one extra lump-sum payment in a given month, you’ll reduce the long-term interest. The graphic below shows how much you’d save by paying an extra $50 a month on a $200,000 30-year fixed loan with an interest rate of 4.375%.

Amortization schedule tells when PMI will drop off

If you weren’t able to make a 20% down payment when you purchased your home, you may be paying mortgage insurance. Mortgage insurance protects a lender against losses if you default, and private mortgage insurance (PMI) is the most common type.

PMI automatically drops off once your total loan divided by your property’s value (also known as your loan-to-value ratio, or LTV) reaches 78%. You can multiply the price you paid for your home by 0.78 to determine where your loan balance would need to be for PMI to be canceled.

Find the balance on your amortization schedule and you’ll know when your monthly payment will drop as a result of the PMI cancellation.

Pinpoint when adjustable-rate-mortgage payment will rise

Adjustable-rate mortgages (ARMs) are a great tool to save money for a set period as long as you have a strategy to refinance or sell the home before the initial fixed period ends. However, sometimes life happens and you end up staying in a home longer than expected.

Knowing when and how much your payments could potentially increase, as well as how much extra interest you’ll be paying if the rate does increase, can help you weigh whether you really want to take a risk on an ARM loan.

The bottom line

Mortgage amortization may be a topic that you don’t talk about much before you get a mortgage, but it’s certainly worth exploring more once you become a homeowner.

The benefits of understanding how extra payments or a lower rate can save you money — both in the short term and over the life of your loan — will help you take advantage of opportunities to pay off your loan faster, save on interest charges and build equity in your home.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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