- advertisement -

6 ways to slash mortgage costs

Ready to plunk down your hard-earned cash for a slice of the American pie? Make sure your financing is low fat.

Buying a home is likely the most expensive, long-ranging financial commitment most of us ever make. The more homework you do before heading out with a real estate agent or before making an offer on a home, the more likely you are to stretch your mortgage budget.

Here are six ways to get the most bang for your money beginning before you step out the door to shop.

Get pre-approved

Get pre-approved for your mortgage loan, rather than just pre-qualified.

With pre-approval, the lender pulls a credit report, verifies a borrower's income and takes other preliminary underwriting steps to come up with a maximum allowable loan amount, which usually doesn't change. The lender also commits, in writing, to making that loan if a purchase occurs within a set amount of time. In a pre-qualification, the customer provides the information, but the lender doesn't check it and there's no assurance that the loan will be approved.

Pre-approval requires the home-shopper to fill out a loan application and provide supporting pay stubs, bank statements, employment information and W-2 forms. Lenders charge for the service -- generally from $20 to $50 -- but it's worth it. Pre-approval puts you in the strongest possible bargaining position with sellers and their real estate agents. Those who are in a hurry to move a property often will accept a lower bid from a pre-approved buyer because they can be certain the deal will go through.

- advertisement -

Check out ARMs

Short on cash? Consider an adjustable-rate mortgage. ARMs feature lower monthly payments at first, something that might help marginal buyers get into a home.

"When you see interest rates going up, a lot of the adjustable-rate mortgages actually become more affordable at that stage in the game," says Peter Goldberg, senior vice president of Ohio Savings Bank in Cleveland. "Ultimately people look for that lower payment and ARMs can really provide a lot of that."

Based on Bankrate.com's weekly national survey of lenders, the interest rates offered for ARMs tend to be about 1.5 to 2 percent lower than the average 30-year-fixed rate. Someone borrowing $150,000 on a one-year ARM at 5.47 percent would have monthly payments in the first year of $849. The same-sized loan with a 30-year fixed-rate mortgage at 7.01 percent would cost $999 a month.

If the one-year ARM's annual adjustment is too volatile for your tastes, some relatively new adjustables offer initial fixed periods that endure longer. Consider a longer-term ARM, such as a 5/1 or 7/1 that features an initial fixed period of five years or seven years. You'll pay a little more in interest than for their one-year counterparts, but less than for a 30-year fixed-rate loan.

Float a balloon

Balloon loans are another option available to get a lower payment in the first few years. These mortgages charge less interest upfront for a set time frame, but require the borrower to either refinance at the end of that period, pay off the loan or convert it to a fixed payment schedule.

On a seven-year balloon loan, a borrower might make payments of principal and interest for that period. Assuming rates didn't shoot up more than 5 percent in the meantime, they might then be able to pay just $250 to roll the loan into a fixed schedule for the last 23 years.

Buy down the rate

If you've got the cash now and want to lower your payments, you can "buy down" your mortgage rate.

It's a simple concept, really: In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments.

Buydowns can be temporary or they can last the life of the loan. The purchaser can negotiate the deal directly with a lender, but sometimes a home seller arranges the buydown as an incentive to attract buyers.

Look for builder incentives

Those looking to buy a new home instead of a previously owned one may find that the builder will provide the incentives. Alan Cohen, a branch manager with Irwin Mortgage Corp. in Indianapolis, notes that companies in his market will sometimes offer a few thousand dollars to consumers to put toward their mortgages. Someone can use that money to buy down the loan rate for a couple of years.

"If you have a rate of 7.5 percent (on a 30-year fixed loan), you might find a buydown set up where the builder will actually allocate the points, say three points," Cohen says. A buyer could apply two points to the first year's payments and one to the second, resulting in a 5.5 percent interest rate the first year, 6.5 percent the second year and 7.5 percent all following years. "The lender will hold the funds like a tax and insurance account, and every month they will draw down the difference out of those funds like an escrow," he says.

That would help people who don't have much money now but expect to earn more later. Others who want to have a low rate for good can put the builder's money toward that end. Using the same loan parameters, for instance, somebody could buy the rate down about three-eighths to one-half of a percentage point for the entire 30 years, according to Cohen.

Trim closing costs

Of course, the mortgage rate isn't the only thing that determines how much financing will set you back. Closing costs add a significant chunk of change to the final bill, so borrowers should try to minimize them, too.

How? For starters, consumers shouldn't overshoot their budgets, according to Don Martin, a mortgage broker who owns Mayflower Capital in Los Altos, Calif. Because the cheapest lenders often have the most conservative underwriting standards, borrowers can end up paying less in origination fees by showing some restraint.

As an example, say a couple with $52,500 available for a down payment wants to buy a $150,000 home. They might be able to qualify for a loan with just $400 in origination fees because the broker's cheapest lender cuts deals for people who get mortgages for only 65 percent of their home values or less.

But if the same pair fell in love with a $240,000 home and refused to let it go, they would be getting a mortgage at about 78 percent loan-to-value. That's still conservative, yet maybe not enough so for the cheapest lender. The broker ends up having to find another company willing to provide the money, and that company might charge $650 in fees.

"So many people desperately need to pay top dollar for a house and that's where they get into trouble," Martin says. "The cheapest lenders won't work with them. The lower the rate that the lender has, usually those folks are real strict."

The same rule applies to other qualifying factors, such as debt-to-income ratio. A borrower who would only have to spend 28 percent of gross monthly income to get a mortgage should be able to obtain one more cheaply than a customer who would have to spend 35 percent or 40 percent.

Consumers have less control over the fees for other closing events because lenders and brokers negotiate them with various third-party providers. Somebody can't call up the lender's title insurance company, for example, and demand that it charge mortgage providers less for its services. But shoppers can take the Good Faith Estimate document, or GFE, that they receive during the loan application process and compare it with those from a couple of other companies. If a credit report costs $100 at one shop and $20 at another, but the second lender's deal is better overall, point out the discrepancy and ask the preferred company to lower its charge.

 

 
-- Posted: April 16, 2002
     

 

 
 

 

Print  
 

30 yr fixed mtg 4.32%
48 month new car loan 3.16%
1 yr CD 0.67%
Alerts


Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS

BASICS SERIES
Begin with personal finance fundamentals:
Auto Loans
Checking
Credit Cards
Debt Consolidation
Insurance
Investing
Home Equity
Mortgages
Student Loans
Taxes
Retirement

MORE ON BANKRATE
Ask the experts  
Frugal $ense contest  
Quizzes  
Form Letters


- advertisement -
 
- advertisement -