Buying a house is exciting, but it can also be expensive. If you aren’t careful, all of the added fees and expenses can eat away at your savings, leaving you house poor. But with the right tactics, you can save money and get the house of your dreams. Here are a few of our favorites:
1. Compare Rates
Start by comparing interest rates so that you can get the lowest possible mortgage payment. The good news is that rates are lower than they’ve ever been. However, this doesn’t automatically qualify you for an exceptional rate. You’ll need to put your best foot forward.
Before starting the home search process, pull your credit report and clean up any issues that are holding you back. Get rid of bad debt, spend less of your credit limit, and pile up the cash. You want to show lenders that your finances are stable, which will motivate them to give you the best possible rate.
2. Eliminate PMI
Private mortgage insurance (PMI) is an insurance policy that lenders require certain buyers to pay for in order to offset their risk of default and foreclosure. Typically anything less than a 20 percent down payment will require PMI. (The cost is usually around one percent of the total loan amount annually. Thus if the loan amount is $100,000, you’ll pay $1,000 per year.)
“One way to avoid paying PMI is to make a down payment that is equal to at least one-fifth of the purchase price of the home; in mortgage-speak, the mortgage’s loan-to-value (LTV) ratio is 80%,” Investopedia mentions. “If your new home costs $180,000, for example, you would need to put down at least $36,000 to avoid paying PMI. While that’s the simplest way to avoid PMI, a down payment that size may not be feasible.”
Other options include taking out a piggyback mortgage or asking your lender for lender-paid mortgage insurance (LMPI). This latter option is where the lender includes the PMI in the mortgage interest rate. (Though it won’t always be cheaper. Run the math!)
3. Expand Your Search
One of the smartest things you can do is expand your search by a radius of one or two miles. In doing so, you may be able to afford a much better house for a much lower price. You’ll obviously have to weigh this against factors like commute, school zones, and resale value, but it’s worth taking into consideration when price is a concern.
4. Negotiate Closing Costs
Everything is negotiable when buying a house, including closing costs. When shopping around for a mortgage, be sure to negotiate with lenders.
Closing costs include things like appraisals, lender fees, title fees, escrow fees, attorney fees, radon testing, home inspections, interest, taxes, etc. On the average home purchase, you can expect to pay roughly 2 percent to 5 percent of the home purchase price. If you’re on the upper end of that range, try to negotiate your way down. You could potentially save thousands of dollars.
5. Shop Around for the Best Homeowners Rate
Homeowners insurance is one of those added costs that you need to consider. It’s also something that can vary dramatically in price from one provider to another. Just as you do with lenders, shop homeowners policies with different insurance companies. You could end up saving a few hundred dollars just by going with another provider.
Reevaluate Your Budget
While all of these tips can help you save money when buying a house, they can only do so much. Ultimately, you have to make sure you’re buying a house that’s affordable for your budget, income, and financial situation.
Remember that the bank’s pre-approval number isn’t necessarily indicative of how much you can afford to pay. They’re only taking a set of isolated factors into account. You have to determine how much you want to spend on your house and what other expenses are priorities in your life. If you spend too much on a house you can’t afford, you’ll end up broke.
Take the time to carefully evaluate your budget and come up with a figure that makes sense. Let that be your budget and then apply the tips above to further reduce the cost.