Friday, July 18, 2008

5 Ways to Save Big on Your Next Mortgage

Buying a mortgage is something most people do only a few times in their lives. In fact most endure the car buying process quite a few times more often than they do the mortgage closing. In both of these cases the buyers make one critical mistake; they misunderstand their roll as a buyer (a.k.a. soon to be owner of a home or car) instead of a borrower.

Yes you do get to move into the house after closing and yes you have technically “bought” the home. But you have used other people’s money to purchase the house and we all know they expect to be well paid for the money they allow you to use.

I’ve written several articles on how to get the lowest interest rate, if you would like copies of these, please contact me and I’ll be glad to provide them to you. But I want to focus this article on how to save money when you are actually purchasing the mortgage. You must be aware that you are purchasing a mortgage first and it is this instrument that allows you to over time, purchase the home.

First, read and understand the paperwork. All fees and costs I will address in this article show up under various names on the Good Faith Estimate of Closing Costs (GFE). Before agreeing to buy any mortgage, you should carefully examine this document. The GFE details the estimated costs of closing the mortgage; lender and broker fees, third party fees, title company costs and any other associated charges.

The other critical document is the Federal Truth in Lending (TIL). This paper shows more than the amount being financed, the total finance fees paid and the total payments made over the life of the loan, it also reports the Annual Percentage Rate (A.P.R.) for the mortgage. The A.P.R. is not the interest rate charged on the loan but the factored result of a formula developed by H.U.D. to help borrowers compare costs of different lenders. The lower the A.P.R., the lower costs associated with the mortgage purchase.

Second, beware of excessive Lender and/or Broker fees. It’s not that we mind the Lender/Broker making a living; we just don’t want them making their entire month’s income on our deal. It is not excessive to see a Broker Fee of 1% of the loan amount. At the same time this fee is almost always negotiable. So negotiate.

Third, do the math on discount points. It is nearly always possible to “buy” a lower interest rate by paying discount points. The secret to making discount points work in your favor is to compare the cost of buying the lower interest rate with the amount the lower rate will save on your monthly payment. For example, a $200,000 mortgage at 6% fixed for 3o years would have a monthly payment of $1,247.74 (principal and interest). Paying a full discount point (1% of the loan amount, or $2,000) might net you a 6% interest rate which would drop your monthly payment to $1,199.10; a monthly savings of $48.64. By dividing the cost of the lower rate, $2,000 by the monthly savings $48.64 you discover that the “break even” point for the lower rate is 41 months or nearly 3.5 years. You will have to make the decision whether or not this works in your favor.

Fourth, avoid markup on third party expenses. Some Lenders/Brokers up-charge appraisal and inspection fees if they are not paid at the time services are provided. You can avoid any up-charge by paying the appraiser directly for his/her services. The same can be done with the home inspector and the pest inspector.

Fifth, carefully watch title costs. This is one area where closing costs rapidly mount up. There are attorney fees, document fees, courier fees, title insurance, abstracting fees, GAP fees, document stamps, filing fees, etc. Most of these fees are competitive between different title companies. But if you are in a city with multiple title companies, take the time to shop. Think of these fees as the title company’s commission for earning your business. Ask them where they can shave some of your closing costs. Even a few hundred dollars makes a difference.