There are countless tips and strategies on how to reduce your monthly mortgage payments, but comparatively few on how to save money on a new mortgage when buying a home. Too many home buyers don’t even know about some of these options, much less give them serious consideration when finalizing the details of the mortgage with their home lender.
Buying Points on the Mortgage
There are two different kinds of “points” that people buy: origination points and discount points. Origination points offset the lender’s cost of processing the loan in exchange for a lower interest rate. Discount points is even simpler in that you’re making a one-time upfront payment to lower the interest rate on the loan. Often, the type of points you’re buying depends on the standard or default loan terms offered by the lender. Some lenders like to market a no closing-cost mortgage but then also offer the option to buy discount points when the borrower realizes lower interest rates are available to them. Either way, you’re paying more upfront to reduce the overall cost of the loan.
On a related note, due to their specific closing costs and loan terms, different lenders offer more generous terms than others when it comes to buying points. Fortunately, there’s a key metric that simplifies the decision to buy points. Ask the home lender what the breakeven date is for the points you’re considering buying. The longer you plan on staying in the home, the more sense it will make to buy points.
Minimizing and Negotiating Closing Costs
Even apart from covering the origination fees and paying down your interest rate, there are other ways to save money on a home loan by minimizing closing costs. Some of the taxes and governmental fees are unavoidable, but many closing costs are negotiable either directly through the lender or through the third-party vendor. This includes the inspection, survey, appraisal, notary, escrow fees, and title insurance.
When available, the most effective way to lower closing costs is to make an all-cash offer. Not taking out a mortgage completely eliminates the underwriting fees and many of the insurance requirements that come with a mortgage. It also makes you a much more attractive buyer to a prospective seller. More real estate investors are also buying properties in cash rather than trying to finance and manage multiple properties, especially as interest rates continue to rise and the cost calculations for taking on additional mortgage debt look less favorable. Similarly, some millennials are getting an edge up on the housing market by using a parent’s home equity to make an all-cash offer. Then, they can work out the mortgage and repayment mechanism after the home is purchased.
As with buying points, many of the most popular strategies for reducing closing costs have trade-offs that you’ll need to be prepared for. Closing at the end of the month will reduce the prepaid interest you’ll need to pay as part of the closing, but it will also reduce the time until your first mortgage payment. It also creates additional logistical stress and hassles as most buyers and lenders are trying to close at the end of the month as well.
Working with Reduced Real Estate Commissions
The total real estate commission on a home sale is negotiated between the seller and the seller’s real estate agent. This leaves few options for the buyer to proactively reduce the commission paid out of the sales price. It also mistakenly creates the impression that there is nothing at all a buyer can do to possibly reduce the traditional 6% commission paid on the home purchase. Whatever the commission on a home sale, it’s typically split between the seller and buyer agents. Thus, it may be important that you choose a realtor who’s willing to work with non-traditional real estate agency commissions.
The good news is that this isn’t an issue for most realtors who are primarily concerned with keeping you as a client and getting referrals to your network of your friends and family. Nevertheless, you can’t take it for granted. In rare cases, we’ve heard stories that a buyer’s real estate agent may avoid showing a home or try to persuade the buyers away from a home because the agent knows that the seller and the property doesn’t have the full 6% commission. This means you may end up with a bigger mortgage for less house—as well as missing out on the actual home of your dreams.