Ready to plunk down your hard-earned
cash for a slice of the American pie? Make sure your financing is
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
Here are six ways to get the most bang for your
money beginning before you step out the door to shop.
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.
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
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
"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