When it comes to buying a home, we often fixate on the interest rates, believing they are the only meaningful factor in determining how much we can save. While interest rates do play a significant role, there are other key strategies you can employ to put thousands of dollars back in your pocket and maximize your savings on your home purchase.
Thousands of dollars? How about 10’s of thousands? The average sale price of a new home at the end of last year was $540,000 and a 30-year fixed was around 6.5%. Assuming 20% down and conservative costs for homeowners’ insurance ($3,500/year) and property taxes ($6,000/year) plus typical additional costs that may have been rolled into your principal, you’re looking at a $3,500 monthly payment. Over 30 years, you’re talking about paying $1.27 million. We’re going to compare our strategies against these figures so keep them in mind as we explore savvy strategies that go beyond interest rates and show you just how much money you could put back in your pocket.
1. Consider Different Loan Types. One of the first decisions you’ll face is choosing the right mortgage type:
- Fixed-rate mortgages offer stability, while adjustable-rate mortgages can provide lower initial rates. A 5/1 ARM as of today is coming in as much as 3 points lower than a 30-year fixed. Using our reference loan above, that’d put about $750 a month back into your pocket. The tradeoff is risk on the back end when the loan starts to adjust, but over just the initial 5-year fixed period you could bank $45,000. Invest those dollars elsewhere or save it to pay down your principal when you refinance if/when the adjustable rate climbs too high. It’s a calculated risk, as always, assess your financial goals and risk tolerance to pick the mortgage that suits you best.
- If you’re a veteran or a first-time homebuyer, there are even more opportunities. How about joining the 13% of borrowers that are taking advantage of VA loans that require no money down or FHA ones that allow for just 3.5% down? File away that notion of 20% down and imagine what else you could do with that $108,000 ($89,000 on a 3.5% FHA loan) that you just recovered. Yes, your payments will be higher and depending on your timeline and financial situation, it may not be the right option, but it’s certainly an option worth exploring.
2. Down Payment Assistance Programs: Free money? Yeah, it’s out there, programs designed to provide financial support to first-time homebuyers, potentially reducing your initial cash outlay. The Federal Downpayment Toward Equity Act of 2023 is looking to award $25,000 to first generation homebuyers. That’s a good start. Matching grants and a host of local programs exist in every part of the country intent on awarding money to eligible applicants. A remarkable amount of that money sits idle due to lack of awareness and applicants. Do your part. File your applications and take advantage of these programs, that is precisely why they exist.
3. Negotiate with Sellers (or other parties to the transaction): Don’t be afraid to negotiate. Ask for concessions on closing costs, home improvements, or other perks that can lower your overall costs. A thorough home inspection before finalizing the deal will identify potential issues that can not only help you negotiate a lower price, but also save you from unexpected repair expenses down the road. If they’re going to be addressed by the seller, evaluate energy efficient upgrades at the same time. You’re going to be in that house for a while, small monthly savings add up and will quickly offset additional replacement costs.
4. Can’t negotiate? Shop around: Closing costs can add up so it’s essential to shop around. Start with title/escrow agencies. Different title agencies charge varying fees for their services, including title search, title insurance, and closing coordination. Your lender and realtor have their go-to providers, but you have the right to choose. Obtain detailed fee quotes from several agencies and compare them to find the most cost-effective option.
While interest rates are an essential factor in your home purchase, they are not the only one. Keep these strategies in mind as you embark on your home-buying journey and you’ll be well on your way to achieving your homeownership goals while maximizing your savings.
Every dollar counts!
