Buying a home is one of the most rewarding experiences an American consumer can have.
It’s also one of the most harrowing.
This isn’t exactly an everyday kind of purchase. Most people will do this two or three times, max, in a lifetime. It’s the kind of investment that requires an abundance of patience, forethought and planning.
In other words, it’s a recipe for disaster if you’re not at least marginally prepared for what awaits. It’s worth noting that homes don’t generally put people in the poor house.
People put people in the poor house.
One way to ensure you don’t wind up getting in over your head: Be honest with yourself about what you can afford. This can prove especially difficult for first-time buyers, who get lured by the siren song and status-booster that is home ownership.
To that end, first-time buyers should investigate all avenues for maximizing their purchasing power and saving money on their mortgage. Here’s a look at just a few:
It’s a dying art among baseball fans. But in the world of home buying, the score that counts most is your credit score. It’s one of the key indicators of your financial health and of your ability and willingness to repay debt.
A poor credit score can kill your shot at buying a home. And the better your score, the lower your interest rate, which means the lower your monthly payments. Benchmarks shift among lenders, but in the current lending environment you’re going to need a score of at least 610 to truly compete.
Thousands of prospective buyers don’t know their score until a loan officer pulls their credit to find out. Not quite a plan for financial success, and here’s a major reason why: Credit reports are renown for mistakes. In fact, an independent study in 2004 found that about a quarter of all credit reports have mistakes serious enough to quash a home loan. You can’t find those errors unless you look and then
Fixing simple mistakes can boost your credit score in a matter of months. And that can mean major savings on that monthly mortgage payment.
Closing Costs and Concessions
Borrowers are sometimes shocked to find out they’re expected to have a hefty chunk of cash on hand to pay for closing costs, which are fees and charges associated with processing and finalizing the home loan. Some government-backed loans, primarily VA loans, cap what borrowers can pay in fees and costs. In most cases, expect to be on the hook for 3-4 percent of the loan amount in closing costs.
First, there’s no shame in trying to negotiate some of those lender-borne fees. Same goes for asking the seller to pay some or all of those costs. No guarantee you’ll succeed, but it certainly doesn’t hurt to ask, especially in this market. Second, there’s no need for you to actually spend money out of pocket on closing costs. By all means, try to save a good pot of cash as your closing nears — then turn around and invest it. You can roll the closing costs into the life of the loan, so long as the home appraises for the new, higher value.
Borrowers pay a little more each month and over the loan term for the privilege. But wisely investing that $7,500 at the time of the loan closing will more than cover the gap.
Consider Alternative Financing
The 80-10-10 mortgage is a perfect example. Borrowers who keep coming up a little short in the down payment department can save money by using an 80-10-10 scheme, which basically means the borrower is on the hook for a 10 percent down payment and gets a second loan to cover the remainder. The second loan helps the borrower avoid private mortgage insurance (PMI), a costly monthly add-on for borrowers who can’t put down at least 20 percent of the purchase price. There are other 80-percent variations, such as the 80-15-5 and the 80-20.
Pad Those Envelopes
It’s crushing for some first-time buyers to realize that years of mortgage payments won’t even chisel away at their principal balance. But borrowers can save themselves a ton of time and money by making extra mortgage payments each month or once a year. On a 30-year $250,000 mortgage at 6 percent interest, paying an extra $100 each month will cut four years and nearly $72,000 off the loan term.