Home buying ideas that will save you thousands

Savings Ideas

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Want to know how to save some money when you're buying a home? Who doesn't? Here are four home buying ideas that will save you thousands:

1. Know the difference between what you want and what you can afford.

Realtors deal with them on a regular basis--buyers who want more house than they can afford. Some homebuyers believe that they absolutely must have certain amenities in their new home, whether they can afford them or not. Of course, such an attitude might get them into big trouble if they end up with monthly house payments that are higher than they are capable of paying. These homebuyers become "house poor" after closing the sale of their new home because their new mortgage payments take up such a large percentage of their take-home pay. They simply cannot afford to take part in the leisure activities they used to do because too much money goes toward paying for their home.

You can avoid becoming one of these people by recognizing the difference between the house you would really like to own and the house you actually need or can afford to own. That house you really want might have 3-4 bedrooms, several baths, a couple of fireplaces, a swimming pool, and a three-car garage. But you can probably live with just 2-3 bedrooms, 1-2 baths, no fireplaces, no swimming pool and a two-car garage. If you fail to distinguish between the two before you sign on the dotted line, you might find yourself stuck in a financial dilemma you cannot easily remedy. Once the ink is dry on your mortgage documents, it is a major undertaking to return to more financially affordable circumstances.

2. Get the seller to help with your closing costs.

When your Realtor writes up the purchase agreement on your new home, ask him or her to include a clause asking the seller to pay a fixed percentage of the sales price toward your closing costs. Lenders have rules on the maximum percentage they will allow, so be sure to learn your lender's maximum before you write the purchase agreement. Most lenders allow a maximum seller contribution of 3%, but some will permit 6% or more.

Putting this clause into your purchase agreement can really decrease the cash you need at closing time. In addition, some sellers might be more inclined to accept an offer asking them to pay higher fees than they would an offer at a lower price. Some sellers become annoyed if a buyer makes a low ball offer on their home--they seem to take it personally. Asking them to pay 3% of your closing costs is virtually the same as offering them 3% less for their home, but some sellers seem more psychologically conditioned to accept that compared to a lower priced offer.

3. Get the seller to pay future property taxes.

Most lenders will not let the previously mentioned seller contribution go toward what are called "recurring closing costs," such as property tax and homeowners insurance escrows. If you are required to include property taxes and homeowners' insurance in your monthly mortgage payment, the lender will also require you to place funds into an escrow account at the time of closing to cover payment for those future taxes and insurance. That is considered a recurring cost because you must pay property taxes and homeowners insurance every year.

The homeowners' insurance deposit required is usually pretty minor, but the property tax escrow deposit can be quite substantial, depending on the time of year. You might have to place from one month to as much as eight months worth of property taxes into that escrow account at the time of closing, or a maximum of 8/12 of the annual property taxes. If the annual property taxes on your new home were $4,800, for example, the maximum you would need to put into that escrow account is $3,200 ($4,800 x 8/12). That could represent a hefty sum to you, especially if this is your first home purchase and money for down payment and closing costs are hard to come by.

You can circumvent this requirement by wording the purchase agreement differently. Ask your Realtor to insert a clause requiring the seller to pay $3,200 toward next year's property taxes, for example. That way, the seller would be putting that money into the escrow account, not you. This will not work on all types of mortgages, but it is acceptable on many. Your loan officer can tell you if the mortgage you are getting qualifies. Some Realtors dislike this type of clause because it makes their job more difficult. They are faced with convincing the seller and the seller's Realtor to accept the extra cost. A frequent tactic to make the offer more palatable is to offer higher than the listing price to make up for the added cost to the seller. However, take care not to raise the price too high because the property might not appraise at the higher value.

Here's how it might work. Let's assume that you want to buy a $300,000 house and you ask the seller to pay 3% of your closing costs and 8/12 of future property taxes. 3% of $300,000 is $9,000, which would be the amount of closing costs the seller would pay, and $3,200 would be the amount of property taxes the seller would pay. By adding these two clauses to the purchase agreement, you have just reduced your initial costs by $12,200 ($9,000 + $3,200). If you had instead offered the seller a price that is $12,200 less than he was asking for his home or $287,800, you would still need to pay the $12,200 in closing costs and escrow fees at closing time. Either way you do it, you're getting the home for $12,200 less. But by asking the seller to pay the fees instead of accepting a lower price, you wind up paying $12,200 less in cash at closing time.

4. Consider "total cost" financing as opposed to the lowest rate.

Many homebuyers assume that the lowest interest rate automatically produces the lowest cost, but that's not always true, especially with today's more complicated mortgage rules. Your down payment percentage, whether or not you will pay mortgage insurance, how long you'll live in the home, your credit score and other factors can all affect the bottom line.

Avoiding mortgage insurance is a prime example of this. Ordinarily you will have to pay monthly mortgage insurance to protect the lender if your down payment is less than 20%. Since it benefits only the lender and can add a hefty amount to your monthly payments, most buyers would rather avoid it altogether. One popular way many loan officers do that is to write two mortgages instead of just one. The first mortgage is written at 80% of the value of the home (commonly referred to as loan-to-value or LTV) and the second mortgage is written somewhere between 0% and the remaining 20% (depending on your down payment). Because the first mortgage is at 80% LTV or less, the lender will not require you to pay any mortgage insurance, and the total payments of the two mortgages together are about $25-40 less than if you simply took out one mortgage and paid mortgage insurance. This is true even though the interest rates will usually be slightly higher on the dual mortgage option.

However, if you take into account the "total cost" concept, you might not opt for the dual mortgage option.

Here's why. The dual mortgage option does not take into account that real estate has been appreciating quite rapidly lately. When home values rise rapidly, there is a good chance that mortgage insurance will not need to be in effect for more than two or three years. That's because as your home's value rises, your loan-to-value (LTV) percentage drops.

Once your LTV falls below 80%, you can apply with your lender to have the mortgage insurance removed. Once the mortgage insurance has been eliminated, your monthly payment drops significantly, and the single mortgage then becomes the better deal. The break-even point on the purchase of a $300,000 home with a 10% down payment is usually about five years. That means the dual mortgage is the better deal if you own the home five years or less, and the single mortgage is often better if you own the house more than five years. If you stay in the house until it is paid for, then the total cost on the single mortgage is about $24,000 less on an initial mortgage of $270,000.

There is a third option, however, that few loan officers are aware of. That option is financing the mortgage insurance into your mortgage and getting a 25-year mortgage rather than a 30-year loan. With this plan, the mortgage insurance is added onto your mortgage balance when you buy your home. The amount added will depend upon your down payment percentage. The monthly payments with this option would be about $68 more than the dual mortgage on a $300,000 home with 10% down and about $38 more than the monthly mortgage insurance option.

That may sound unattractive, until you consider total cost. Upon analyzing the total cost, we learn that the break-even point on this option is only three years. After that the total cost is lower on the financed mortgage insurance option than either of the other mortgage options. If you stayed in your home until it was paid for, the financed option would save you over $75,000 in total costs compared to the dual mortgage and about $51,000 compared to the monthly insurance option. You save more with this plan because, by switching to a 25-year mortgage, your mortgage balance will decline faster and you will pay less interest.

Determining how long you will live in your home is a big factor in deciding which option to go with. As a general rule of thumb, the dual mortgage makes the most sense if you intend to be in your home for only a few years; however, the financed mortgage insurance option is your best bet if you expect to be there for more than three years. But if you fail to consider the total cost concept, you might make a $75,000 mistake. And if you don't talk to a loan officer that understands the differences, you won't be offered all of the options.