Don’t settle for the status quo when it comes to your mortgage. Being proactive during the lending process could save you money.
No one ever said buying a home – and keeping up with monthly mortgage payments – was easy. And with mortgage rates and other related costs projected to rise, you might think that it’s not the right time to buy a home, but that’s not necessarily true.
“This is still an incredible time to be a homeowner with prices still off the highs of 2007’s peak and today’s rates allowing you to get a better bang for your buck,” says Brian Fishman, vice president of mortgage lending at Millennium Bank in Illinois. According to him, he’s witnessed significant highs and lows while being in the mortgage banking and brokering business for more than 20 years and currently, rates are still at historic lows.
However, even with low rates, you should be proactive in trying to get the most affordable mortgage possible. So keep reading for how you can save big on your home purchase.
Interest rates are projected to rise, so take advantage of rates while they’re still low.
Most economists agree interest rates are going to go up, according to Cameron Findlay, chief economist for Discover Home Loans in California.
“If rates move [up] very quickly, that can cause some severe shocks, as opposed to rates moving at a more moderate pace increasing over time,” says Findlay. Right now, though, the jury’s out, as rates can be volatile if not illogical, he explains. But the good news is that if the timing is right for you to buy now, you can do so and avoid any increases whatsoever while rates are still low.
“If a homeowner can get a mortgage anywhere in the 4 percent area, that is still great,”says Tal Frank, president of Physician Loans, a loan consulting company for graduates of medical school.
Already own a home? Well, if your monthly payment would decrease thanks to refinancing to a lower rate, there’s no reason to wait, says Frank.
Findlay adds that if your house has appreciated significantly since getting your initial mortgage, refinancing would allow you to secure a higher mortgage loan at a lower rate. As a result, you could take more cash out of your house for other debts, purchases, and savings, and get an increased tax deduction for the interest on the new refi.
Conversely, if your house has remained the same in value, the effect will be less pronounced and potentially not worth refinancing unless the rate you’re securing is far lower than what you initially received, according to Findlay.
Mortgage closing costs are up more than 20 percent in some states, but you can negotiate to keep them low.
When you’ve been approved for a mortgage on your desired home, you will have to pay closing costs to finalize the deal with your lender. Unfortunately, closing costs are actually up 6 percent across the board over the past year, fueled by lender fees rising 9 percent and third-party fees rising 1 percent, according to Bankrate.com.
Lender fees cover items such as underwriting, processing, document preparation, credit reports, and flood certificates on a purchase or refinance. On the other hand, third-party fees cover items such as the title company charge for verifying ownership of the property and the appraisal that assesses the value of the home. So what’s your best strategy for saving on these expenses?
As far as lender fees go, Freeborn says that generally, lender closing costs equal between 2 to 3 percent of the loan amount but have the potential to be higher. They may be paid up-front or sometimes the lender will finance them by adding them to the total amount borrowed. When comparing various home loan offers, Freeborn advises borrowers to focus on the costs that are controlled by the lender.
“Every lender has different loan programs and pricing, so it is important to look at all of these costs – not just the quoted interest rate – to help determine which offer is the best deal for the borrower,” says Freeborn. “Items and their cost that are determined by the lender include interest rate, discount points, origination charge, rate-lock fee, and any other fees for document preparation, processing, application, and underwriting.”
Frank says that while there’s not much room for negotiating lower lender fees, it is important to do your due diligence in speaking to at least a couple of lenders so you have a ballpark figure for what these fees should be.
For a quick way to compare costs of a loan across lenders, Freeborn suggests using the Annual Percentage Rate (APR) because it most accurately reflects the total cost of the loan.
“The APR reflects the combined cost of the interest rate, the origination charge, discount points and other upfront costs such as lender fees, processing costs, document fees, prepaid mortgage interest and mortgage interest premiums,” says Freeborn.
In terms of rising third party fees, Frank says the spike can be attributed to the new regulatory landscape which requires a lot more paperwork, redundancy in disclosures, compliance costs, and penalties to lenders for even minor administrative errors.
“The increased costs are to cover the new expenses that have come about since implementation of the Dodd-Frank Act. Licensing and compliance has simply gotten more expensive. Underwriters are required to be a lot more thorough, which is increasing costs. Appraisal costs have increased due to the required use of third party appraisal management companies,” says Frank.
So what does that mean to you, the prospective homeowner? Well, given your particular loan type and your specific part of the country, Frank says there are certain ranges that are appropriate for these third party costs.
To avoid being overcharged, Frank suggests going over the numbers you’ve been quoted with your real estate agent and lender, both of which should be familiar with the individual rates in your area.
Typical appraisals, for example, run from $350 to $1,000, depending on the size and value of a home, so anything higher or lower could be a scam that could cost you big time now or down the road, says Fishman.
The bottom line here is that you have to do your research, because saving money could be as simple as having a few conversations with industry pros and local homeowners to make sure you’re being quoted reasonable numbers.
Mortgage insurance costs are increasing, so try to save for a higher down payment to eliminate PMI.
According to Fishman, private mortgage insurance (PMI) is required for any borrower putting less than 20 percent down on a purchase or having less than 20 percent equity in the real estate on a refinance. Monthly PMI payments have been increased over the past five or so years and the cost shouldn’t decrease in the near future, according to Frank. He attributes PMI increases to the rash of defaults several years ago when several mortgage insurance companies went under.
For Frank, the best way for a consumer to combat the increase is to avoid loans with mortgage insurance altogether. But since that requires 20 percent down, it’s not always feasible, so the next best option is to get a loan with a lower mortgage insurance rate, he explains.
Frank says insurance rates are based on default rates of the population. Since FHA loans only require 3.5 percent down and allow lower credit standards, Frank says it has among the highest default rates and therefore the highest insurance costs.
A better option would be to aim for a Fannie Mae or Freddie Mac loan, which only requires 5 percent down and a lower PMI payment, which means cheaper monthly payments over the life of the loan, says Frank.
“By making sure you can afford a 5 percent down payment and that you have a high enough credit score to qualify for a Fannie or Freddie loan, you can save on your total PMI cost,” says Frank.
Even if you can’t afford the 20 percent down payment it takes to opt out of PMI, you can still decrease your mortgage insurance rate, no matter the type of loan, by simply putting more money down, he explains.
“So just saving for a higher down payment will lower [your] mortgage insurance,” says Frank.
Don’t miss out on special mortgage programs made for your unique home buying situation.
A penny saved is a penny earned, right? Well, if you want to catch a break on your mortgage, you’ve got to be your own advocate. It never hurts to ask about government programs, or if you’re working with a small local bank, other creative ways to finance your home purchase.
Are you a first-time homebuyer, buying in a historic district, or planning to make home improvements? This is the kind of information you should be disclosing to your lender or loan officer, since there might be a grant or program that could save you money your home loan.
For instance, if you’re considering a refi, you might be best served by going back to your original lender if you had a positive experience. Many banks have a repeat customer discount that you could take advantage of the second time around, which may compound the savings you’d incur by refinancing to a lower rate.
For example, you might be able to forgo the origination fees on your second loan, a bonus that Discover Home Loans offers to their customers, according to Freeborn.
Working with a small community bank can have its upside as well. “As a local bank in the state of Illinois, we are able to participate in some grant programs with as little as $1,500 down with limited funding available on an annual basis,” says Fishman.
According to Fishman, if you opt for a small local bank, the key to saving is explaining your finances, payment capabilities, and housing preferences upfront so a lender can tailor a loan to you specifically and ensure that your game plan, depending on cash flow and savings, is feasible.