Despite the tepid national economy, home ownership remains one of the cornerstones of the American dream. For most people who are responsible with their mortgage application, it’s still a great investment for the long term.
But it’s not as easy as it sounds. For scores of prospective homeowners, the prospect of finding, then financing a new home can be daunting. The key is to take it a step at a time, and be as thorough as possible because purchasing a home is one of the biggest fiscal decisions a person can make. Rushing in or relying on ill-informed (or even ill-intentioned) lenders can lead to long-term disaster.
Prospective home buyers should bring a high degree of scrutiny to skepticism to the process. They should also keep an eye open for any and all ways to save money on their home mortgages. These are big-time expenses that can handcuff families financially for years. Finding ways to save even a little each week or month can make a huge difference over the life of a mortgage.
Below are a few options for homeowners to consider when looking for cost-saving approaches to their home mortgages:
Own Your Credit Report
A 2004 study by U.S. PIRG found that 25 percent of credit reports contain errors serious enough to keep consumers from obtaining home loans and even jobs. Make sure to scour your credit reports and keep close watch for oddities with balances, dates and account statuses. If you do find errors, take careful note and start putting together documentation and letters to the credit agency that bolster your case. Take these errors seriously as even small mistakes and inaccuracies can lead to big impacts on your credit score. Correcting those errors can help boost your credit score and open the door to more favorable loan terms.
Think Long and Hard About the Length of the Loan
It is a simple yet powerful maxim: Get the briefest mortgage term you can reasonably afford. For most new homeowners, you’ll spend a big chunk of time and money paying down your interest before you ever start eating away at the principal. There are lenders and math junkies with multiple examples and breakdowns explaining how much more money you’ll pay for those extra 10 years if you opt for a 30-year mortgage instead of a 20-year. Financing $80,000 at 7 percent interest, a borrower would save more than $42,000 with a 20-year mortgage instead of a 30-year. Those savings would almost double if you could whittle it to a 10-year term. The point is, scrutinize your immediate and long-term financial situation and consider skimping for a few years to save a lot of money in the long run.
Make One Extra Mortgage Payment Per Year
Putting a little extra in the envelope each month can make a huge difference. Assume you’ve got a $100,000 mortgage at 7 percent interest and a 20-year term. By putting just $100 more toward the principal each month, you can shave off four years and about $20,000 in total payments. It’s another case where finding ways to scrape together a little extra cash each month can pay huge dividends. When sending in an extra payment, be sure to notify the mortgage holder that you want the additional funds applied toward the loan principal. Many homeowners send that additional monthly payment in a separate envelope, just to underscore the difference.
Assume an Existing Mortgage
It isn’t common, and some would argue that assumable mortgages are to be avoided at all costs. Many banks and sellers have little interest in these. But there are times when they can make sense and save prospective homeowners money. Sellers will typically require a cash down payment to make up for their pending loss of equity. Borrowers will have to pay the difference between the remaining debt and the home purchase price. These options can be a good deal for the buyer if the interest rate on the mortgage is better than current rates. Prospective buyers with more liquidity may also consider these unique mortgages structures.
Consider an 80-10-10 mortgage
You might hear this referred to as piggyback financing. These are actually two mortgages that combine to eliminate monthly private mortgage insurance payments. In essence, these specialized options cut a mortgage into two loans, where 80 percent is financed as a first mortgage, 10 percent is a second mortgage and the other 10 percent is typically a cash down payment. These loan payments are tax deductible, while PMI payments are not. An 80-10-10 mortgage also allows some buyers to purchase ahead of schedule, a key money saver in areas prime for a rebound in housing prices.
Update: As Erica in the comment section pointed out, PMI is tax deductible. In fact, congress has extended this through 2010 but only if refinanced or bought the home in 2007 and later. In addition, the tax deduction begins phasing out once you earn $100,000 a year.
Find a Trusted Lender
This one is kind of a no-brainer, but it’s still incredibly important. Prospective buyers should conduct their due diligence and shop around until they find a lender they are truly comfortable with. Anyone who isn’t willing to answer questions thoroughly or work to save you as much money as possible probably isn’t a good fit. If you wouldn’t hire a shoddy mechanic, a suspect physician or a deadbeat lawyer, why settle when you’re dealing with a major long-term purchase like a new home?
This is a guest post by Brandon Laughridge of Mortgage Loan Place. MLP Specializes in educating consumers about mortgages with an emphasis on FHA loans. Try their free mortgage calculator or follow them on twitter if you liked this article.
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Hello,
I’m thinking of buying a home but with 5% down. The mortgage payments would be about the same as my rent and hopefully, I can get the sellers to foot the closing costs. Or buy a foreclosure that would for about 50-60k which would make my payments around 200 – 300 a month. In both scenarios I plan on buying a home that is cheap but in a good neighborhood. There are programs here in Louisville, KY that will help with closing costs (on regular mortgages too) and repairs on foreclosures. The problem is that rents are going up in this area but you don’t see any improvements in the properties for rent and the areas with really cheap homes and/or rent are not safe.
So, if anyone has any suggestions on what I should do please feel free to reply. The 20-30% rule is not an option.
To make your mortgage payments every two weeks, doesn’t that have to be stated in your original loan agreement? My husband and I are trying to refinance because our interest rate is 9-1/4%. You saw it right. Nobody wants to work with us so we are trying to find ways to either pay more or pay more often to save money.
Understanding the loan application and closing process will not only help you get the best deal available to you but also help you avoid unethical mortgage brokers and loan officers. In my book “Getting To Closing” (www.CherylLPeck.com), I give readers a step-by-step guide to the process. You will also find additional information to save money both at closing and after.
Hey Lee – Yes, it was hilarious, and as I feel bad hyperlinking my articles too often, you can read about the 13% scenario on my site entitled “Property Makes People Think Irrationally”. I’ll go check out your thoughts. FS
@Financial Samurai: Couldn’t agree more. I posted recently about my own rent/buy pondering and while I haven’t posted a conclusion yet, even my initial post posited the fact that 30% down as a minimum is a must.
13% down is mad. To have come from a PF blogger? *shocked*
@ Austin – The 30% rule is definitely my rule too. Your dad is a wise man. 🙂 There’s this 28 year old OF blogger who asks the community whether he should buy his place with “13%” down. It’s so irrational, but also quite intriguing why people are driven, let a lone a PF blogger to do silly things with their money.
Without going into too much detail, on the face of it, I save about $4,000 a year on my rental property mortgage by using my HELOC to pay down principal. It’s a 2% arbitrage spread, which not only saves my about $4,000/yr, it takes off over 10 years of the life of the main loan.
I do like throwing in an extra principal payment every year for the heck of it. My extra payment ranges between the amount of $100 to $30,000 a year, multiple times a year. It’s fun to do, and you won’t even miss the money.
Financial Samurai
I’ll have to disagree with getting the shortest mortgage term possible…. I have always gone for the longest and least payment option. Now – that does NOT mean that that is what my payments are – it only means that I have gotten a ‘worst case scenario’ mortgage …. Meaning – if times get tough for me financially, I would not want to miss a payment – therefore get the lowest payment possible ON PAPER…. that’s the minimum you will have to pay.
Then – make payments for twice or 3 times that amount, make extra payments, pay every 2 weeks, throw snowflakes at it, whatever it takes to get it paid off early. My last mortgage was a 30 yr one – paid off in 9 years.
Basically, what I did was buy myself some breathing room in case times got tough during the payment phase. Worked for me. I have done several properties this way – ALWAYS taking a long mortgage, and ALWAYS paying off very very early. It does take self-discipline tho – and focus – lots of both 🙂 Good luck.
My father always told me to save up for a house and to not buy it until I have a 30% down payment. For years, I thought he wasn’t opportunistic enough but I’ve come to appreciate what he’s said. While no one got rich that way, we were never poor either, which is much more important to us. If anyone ask me, I will always tell them to be on the conservative side when it comes to mortgages.
I don’t think 80-10-10 is a good type of mortgage. While it certainly gets around PMI payments, there’s a reason why you have to pay insurance when you don’t have 20% down. In the current meltdown, so many home owners bought houses with 0% down that they couldn’t afford. If everyone bought homes with at least 20% down, we wouldn’t have this crisis to begin with.
Most people spend the same amount of time deciding no matter how important the decision is. They might spend 1 hour to decide on the pair of shoes they like, and about an hour to decide which mortgage they will pick. It’s amazing to me why this happens, but it does.
Spend more time researching your options, or else don’t complain when you didn’t get a good deal.
My husband and I have been making bi-weekly payments with our mortgages instead of once a month since we bought our first house ten years ago. From calculations, our mortgage will be cut by about seven years so it really works. Best of all, since we get paid every two weeks, we don’t even notice the difference.
Factual error in the article. Correction: PMI can be tax-deductible.
-Erica
“Prospective home buyers should bring a high degree of scrutiny to skepticism to the process.”
Agreed. I have yet to purchase my first home, but I will spend a ridiculous amount of time trying to hammer out specifics. It’s just too big of an “investment” to blow off the details.
Aside from the 80-10-10 thing, these are all excellent points for UK readers too. I’m glad to see the world of mortgages is fairly universal.