The key to saving money on your mortgage is to get the best possible mortgage for yourself.
Sounds so obvious it's silly, right? But the point here is that you don't need to do it the
way everyone else does. In fact, if you're willing to educate yourself in the ways of the
mortgage world, you can save quite a bit of money by being a little different. Below we
introduce you to some of the strategies that other Fools have used. But remember, the only
person who knows if it's right for you is you.
The 6% Solution
There is something called a seller concession that can save you money. It works like this:
suppose you agree on the price of the house at, say, $200,000. You then ask the seller for a
6% seller concession. What this means is that you add (up to) 6% to the price of the house.
That's right, you're now going to pay $212,000 for that house -- but the seller is going to
give you that $12,000 back when the sale takes place. You're going to use that money to
cover all of your closing costs.
If we pretend for a moment that those costs add up to precisely $12,000, then what you've
done is folded those closing costs into the mortgage. Points, title search, recordation fees
-- all of the items that you'll find listed in our "closing costs" article, and
most of which are not tax-deductible -- have effectively been included in your mortgage.
Since your mortgage interest is tax-deductible, these costs have effectively become tax
write-offs.
In addition, you don't have to come up with all that extra cash at settlement. Your down
payment will be somewhat higher, (if you're putting down 20%, then in the current example
your down payment would be $42,400, versus $40,000) and, of course, your mor tgage payments
will be higher, but it ends up saving you money.
The seller has no reason to refuse this -- after all, the agreed-upon price is still the
same.
What's the catch? The catch is that the house has to appraise for the higher value. If the
appraiser comes back and tells you that this house won't appraise for higher than $200,000,
you can't do it.
Let's look into this a little further. Say you buy the house for $200,000. Your $40,000 down
payment leaves you needing a loan for $160,000. You get a 30-year loan at 8%. Your monthly
payments for principal and interest are $1,174.
Now say you decide to use the 6% seller concession strategy. You buy this house for the
price of $212,000. You put down 20%, and this leaves you needing a loan of $169,600. Your
monthly payments will be $1,244, or $70 more per month. Is it worth it?
To begin with, many people aren't going to feel an enormous difference between paying the
extra $70 per month -- not nearly as much as they would feel over having to fork out an
extra $12,000 all at once. But what about the fact that you have to now pay this extra
money over the course of 30 years? Well, over the course of 30 years you're paying $25,200
more for that extra $12,000 ($70 more per month x 12 months in a year x 30 years = $25,200).
However, remember that's $12,000 less out of your pocket at the time of closing. If you
take $12,000 and invest it at 10% (less than the market average has returned over the past
35 years) then your money will grow to over $200,000 (before taxes) at the end of 30 years.
So, in this scenario, it's well worth it.
Naturally you'll want to run the numbers for your particular loan to see whether it would be
worth it for you.
Note: there are certain rules under certain mortgages as to what the seller can actually pay
for at closing. If you get $12,000 from the seller and all of your costs are $12,000, this
does not necessarily mean that you won't have to pay anything. Be sure to ask your lender
which costs the seller may cover.
Assume an Existing Mortgage
One option is to assume the mortgage on the house you are buying. (That's another way of
saying you'll take over the existing mortgage on the house, rather than getting a new one.)
This is beneficial if, for example, the existing mortgage has a lower inte rest rate. You
can also avoid some of the administrative costs of taking out a new loan. In order to assume
a mortgage, it must be transferable, and you must be able to pay enough cash (or get a second mortgage) to cover the
difference between the purchase price and the outstanding debt.
Seller Financing
"Seller financing" means that you can pay the seller directly over a period of time, rather
than borrow money and pay at once. With a seller mortgage, you can often negotiate a better
interest rate and avoid the various administrative fees charged by lending institutions.
Seller financing can be attractive if for some reason you can't qualify for a loan. More
importantly, it enables you to avoid the dreaded mortgage insurance.
One circumstance in which such financing is available occurs when the seller has had
difficulty in selling the house. If that's the case, you'll naturally want to know why.
Also, sellers are not in the lending business. They tend to want a short-term mort gage --
usually not longer than three years. After that time, you will have to get a mortgage
from a regular lender and pay the seller in full.
There are other reasons why a seller might want to provide financing. It gives him a steady
stream of income and return without having to pay capital gains tax. The seller also has
collateral -- the house. If the buyer defaults, then the seller can take the house back.
Play With the Points, Play With the Time
Yes! You see? Mortgages are just like basketball! Depending on the mortgage, the strength of
your finances, and the interest rate environment, it might be to your advantage to pay off
the interest or principal
sooner than you might otherwise. Check out our calculators to find out if you should pay
points or take
out a 15-year mortgage instead of one for 30 years.
Pay Down the Principal
For a very long time, most of the money that you will pay to your mortgage company is going
to go to interest payments. That means that you may be in your house for over 20 years
before you own more of it than the bank does. But there's a way to speed up the amount that
you own. And why is that important (other than the obvious psychological benefits)? Because
if you owe less to the bank, you will also owe them less interest. Click on over to our Foolish calculator to
find out how it works and to see if it will work for you.
Be Your Own Best Advocate
Mortgage lenders must compete for your business. That means they will negotiate. Don't
assume that their published interest rates are final. Collect information on available
interest rates and mortgage features from lenders in your area. Decide which features meet
your needs. Be prepared to ask for better terms -- a reduction of at least a quarter percent
of the published interest rate is reasonable. You will be in a stronger negotiating position
if your credit history is good.
Lenders will also ask you how much you're prepared to put down. Let's take a look at the down payment next.