Buying a house will likely be the biggest financial transaction of your life, and you can easily spend more than you should along the way. No worries — we’ve got you covered with six ways to cut the cost of getting and paying a mortgage when you buy a home.
One of these tactics is best done as early as possible — before you start looking in earnest for your next home. Other tips come later, after you’ve made an offer on the house and have applied for a mortgage. Here’s how you can save.
The Bankrate Daily
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Get preapproved for your mortgage loan, rather than just prequalified.
With preapproval, 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. The lender also commits, in writing, to making that loan if a purchase occurs within a set time. In a prequalification, the customer provides the information, but the lender doesn’t check it and there’s no assurance that the loan will be approved.
Preapproval requires the home shopper to fill out a loan application and provide supporting documentation about income, employment, banking activity, debts and assets. Preapproval puts you in the strongest possible bargaining position with sellers and their real estate agents. That’s important in today’s seller’s market, where there are more would-be buyers than home sellers, giving sellers an advantage in negotiations.
Instead of cutting prices of new homes, the homebuilder sometimes offers thousands of dollars in discounts as an incentive to use the builder’s preferred lender and settlement company. It’s always a good idea to shop for a mortgage independently, in the hope of finding an even better deal than the builder and its affiliated lender offer.
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Look at adjustable-rate mortgages
Adjustable-rate mortgages, or ARMs, feature lower monthly payments at first. This can help you get into a home when finances are tight.
ARMs plunged in popularity after the housing bust, but they are gradually recovering. “It’s happening because the price of homes is going up faster than incomes, and affordability has stalled,” says Alan MacEachin, chief economist for Navy Federal Credit Union.
The most popular ARMs are 5/1 and 7/1 adjustables, in which the initial interest rate lasts for five or seven years, and then adjusts annually after that. These loans are suitable for buyers who plan to stay in their homes for five to eight years, MacEachin says.
If you have the cash now and want to lower your payments, you can buy down your mortgage rate by paying discount points.
It’s a simple concept: In exchange for more money upfront, lenders are willing to reduce the interest rate they charge, cutting the borrower’s payments.
A payment of 1 percent of the loan amount is called 1 point. Generally speaking, a point will decrease the mortgage rate by a quarter of a percentage point, although in practice you might have to pay a little more or even a little less. Ask about discount points when you compare mortgage lenders. Bankrate’s points calculator will prove helpful.
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Trim closing costs
You pay all sorts of fees when you get a mortgage. Some are charged directly by the lender, and other fees are charged by third parties, such as title companies and credit reporting agencies.
And comparison-shop third-party fees. In most states, you can save money by comparison-shopping for title insurance. That can be a big money-saver. You can shop around for the home inspection, survey and homeowners insurance, too.