For most buyers, the mortgage is the largest monthly expense they will ever have. Yet many borrowers don’t know how to prepare, negotiate or shop for mortgage loans.
- Compare lenders. A loan officer works for a bank or savings and loan and offers you proprietary loan packages. A mortgage broker shops your deal around to various lenders and gets quotes for you. You’ll have to share personal financial information to get a realistic rate, and then pick the lender’s offer you like best.
- Pay attention to terms. All fees are negotiable. It’s all in your loan estimate and closing disclosure form when you’ve applied for the loan, so ask for a blank one up front so you can compare fees. Ask the reason for each fee if it’s not apparent.
- Choose the right type of loan. Current market conditions favor fixed rates, because rates are rising from all-time lows. Yes, they cost more than hybrid loans or adjustable rate loans, but the base amount is fixed and doesn’t change. Only your taxes and hazard insurance will cost you more over the years.
If you get an adjustable rate mortgage, you are at the mercy of market conditions. While there’s a cap on how high your interest rate can go, it’s only a good risk if you plan to occupy your home less than five years.
Ask your lender to explain the risks and benefits of the types of loans available.
In terms of your mortgage, a point is an additional loan fee that is paid to the lender in exchange for a lower interest rate. It’s called “buying down,” and it allows you to reduce your rate for the life of the loan.
Let’s say you secured a mortgage loan for $500,000 without points, at 4.6% on a 30-year mortgage, your payment would be approximately $2,560 a month. If you paid two points ($10,000), the interest rate would go down to 4.1% and the monthly payment would decrease to around $2,415, a savings of $145 a month.
It would take you about eight years to recoup the money you paid up front. If you are planning on staying in your home a while, this will save you money in the long-run. Before deciding, ask yourself:
- How long will I keep the home?
- Do I have extra money to pay points?
- Could that money be better used for something else?
Some may suggest that a smarter option is to invest that $10,000 because you could do much better than your $140 savings, but you have to weigh the variables.*
Here are three simple rules of thumb in determining your particular course of action:
- If you plan to stay in the house for less than three years, do not pay points
- If you plan to stay in the house for more than five years, pay 1 to 2 points
- If you’ll be in the house for three to five years, paying points doesn’t make a significant difference
Since points are interest-payment related, they may be deductible on your taxes in the year that you close. See your tax advisor for details.
Mortgage points can add up to valuable savings over the course of your loan, but the future isn’t always predictable. Even if you “plan” on staying in your home for 20 years, changes in your career or family life could alter that plan.
* The above example is for illustrative purposes only. Be sure to check with your financial or tax advisor regarding your particular situation.
Buying a new home can be a huge, complex undertaking, especially when it’s your first time. That’s why it’s important to have an experienced real estate agent guiding you along the way.
The biggest mistake new buyers can make is underestimating the costs of buying a house and maintaining it over time. Many experts agree that homeowners should have 1%-3% of their homes’ purchase price in savings for improvements and surprise expenses. It’s wise to have at least six mortgage payments in the bank after a closing. These estimates may not work for everyone, but if you are spending above your means on a new home, you may quickly find yourself in financial trouble.
Inspections are important for the first-time buyer, as they list repairs that will be needed for the home. A buyer should put together a short-term and long-term plan based on the inspection so they know how much money they will need in the months and years ahead.
Renters are accustomed to paying basic utilities. Homeowners, on the other hand, must also pay for water, sewer and trash collection—as well as property taxes, homeowner’s insurance, homeowner’s association dues, yard care, snow removal and other expenses unique to your location.
Buying a home is one of the largest investments you’ll make. Your real estate agent will help each step of the way, first helping you establish a realistic price point for your home purchase and a clear understanding of your monthly expenses.
Ever dream of owning a home but don’t think you can because you lack the down payment and closing costs? Here are a few tips:
- Borrow from your retirement account: A 401(k) or traditional IRA may allow a first-time homebuyers to borrow up to $10,000 for their down payment without incurring a penalty. If you’re self-employed or your employer allows it, you may also be able to borrow up to $50,000 from your current 401(k) and pay yourself back over five years at a reasonable interest rate.
- Ask family: If you are able to get help from a family member, the lender may ask you to sign a gift-letter form, attesting to the relationship. They may also require your relatives to explain where they got the money and prove that they are financially able to make such a gift.
- Look for down payment assistance grants: Down payment assistance and community redevelopment programs offer affordable housing opportunities to first-time homebuyers, low-income and moderate-income individuals and families who wish to own a home.
- Come to a lease/purchase agreement: Homeowners who can’t sell their homes may consider a lease/purchase agreement, where you rent the home you want to buy and a percentage of your rent is applied to the down payment. Make sure you get a contract outlining all the details so both parties are protected.
- Add it to the wedding registry: Some mortgage companies allow those getting married to set up a down payment registry.
- Cut back and save: If nothing else, there’s always the old-fashioned “saving for a rainy day.” Try putting aside 10% of each paycheck and eating at home instead of eating out. If you’re married, save the money you would spend on birthday, anniversary and Christmas presents and put it toward your house. You also may need to forget that vacation this year.
These sacrifices may seem significant but they will be worth it once you’re inside your own home.