For the first-time home buyer, finding ways to save money is an important consideration.After all, going in debt by borrowing tens of thousands of dollars for twenty or thirty years is a huge financial commitment and a lengthy legal process that is both complicated and mysterious. This article will take a look ways for the home buyer to save money by negotiating typical fees and costs charged by lenders for mortgage loans.
Mortgage loan origination fees. Mortgage loan fees are charged by lenders to get as much money as they can from you. Typically, borrows are told that fees are charged in order to cover the cost of processing the loan or providing some other service, even though they are going to reap huge profits by packaging and reselling your mortgage to another financial institution. The good news is that mortgage loan lenders compete for every dollar of your money so you can save by shopping around for a lender that charges the lowest, or no mortgage loan origination fees.
Interest rates vs. Lower Monthly Payments. There's a financial trade-off between the size of the down payment, the interest rate you will be paying, and how much the monthly mortgage payment is going to be for the next 30-years. Take a look at an amortization table, which your lender can provide you, to get an idea of how interest rates, principle and interest payments are going to affect your budget for the amount of money you are borrowing.
Down Payment Amount. The more money you put down on your house, the less you have to finance, and the lower your monthly payment. It makes sense to save as much money as you can and make the largest down payment possible. If you are saving for the day when you can afford to buy a home, be sure to calculate and add in the effect of creeping inflation on the price of homes.
Typically, lenders require a minimum of 20% down, although lower percentages are available with Private Mortgage Insurance, which insures the lender's risk of loaning money with a lower down payment percentage. Government backed guaranteed loans, such as FHA and VA loans and a few others, may not require any down payment at all.
Fixed Interest Rate Loans. Mortgage loan interest rates are either fixed for a certain period, typically 15, 20, or 30 years, or they are adjusted periodically. Fixed rate loans are locked in when the loan is initiated and never change over the life of the loan, regardless of the effect of changing interest rates. Fixed rate mortgage loans carry have a slightly higher interest rate, but because they don't change, the can save money over the long term. Fixed rate loans can be refinanced, typically after two years from origination, to a lower interest rate if the opportunity presents itself.
Adjustable Interest Rate Mortgage Loans. Adjustable Interest Rate loans or ARMs, feature lower interest rates early in the life of the loan, but they are indexed and adjusted to changes in government treasury rates or some other figure. Your monthly mortgage payment is mostly interest for half its life. Since interest constitutes the largest portion of your payment, an increased interest rate can jack up your mortgage payment significantly.
Interest rate adjustments can be severe, and not work in your favor as the government will require banks to raise their rates in order to offset the effects of inflation. Be careful when obtaining an ARM, as the proliferation and creative variation of ARMs were a major contributing factor to the last housing bubble. Be sure to check for how the rate is indexed and if there is a cap on the amount of increase in interest a lender can charge.
Points. Points, or a discount, are fees charged by lenders, typically 1 percent of the amount of the loan value depending on the size of the down payment. Points can be negotiated with the lender as a trade off for a lower interest rate. The outcome will affect your monthly mortgage payment, so you can save money by choosing a lender that charges fewer, or no points.
Closing Costs. Closing costs, also known as settlement costs or fees, are expenses paid by either the home buyer or the seller that must be paid before the title to the home is transferred to the new owner. Closing costs can be considerable and the amount depends on a number of factors including lender fees and location Lenders are required to disclose all closing costs to the borrower, so it makes sense to negotiate with the lender on different fees. Some fees are paid by either the buyer or the seller, depending upon the terms and conditions stipulated in the purchase agreement.
Home buyers will benefit the most by comparing all the various charges and fees required by different lenders before committing to the long-term financial contract called a mortgage. Homebuyers can save money by taking control of financial decision making, by not allowing bankers, real estate agents, or brokers to decide how to spend their hard earned money for many years to come.