| Ready to plunk down your hard-earned cash for a slice
of the American pie? Make sure your financing is low fat.
Buying a home
is likely the most expensive, long-ranging financial commitment most of us ever
make. The more homework you do before heading out with a real estate agent or
before making an offer on a home, the more likely you are to stretch your mortgage
budget.
Here are six ways to get the most bang for your money beginning
before you step out the door to shop.
Get pre-approved
Get pre-approved
for your mortgage loan, rather than just pre-qualified.
With pre-approval,
the lender pulls a credit report, verifies a borrower's income and takes other
preliminary underwriting steps to come up with a maximum allowable loan amount,
which usually doesn't change. The lender also commits, in writing, to making that
loan if a purchase occurs within a set amount of time. In a pre-qualification,
the customer provides the information, but the lender doesn't check it and there's
no assurance that the loan will be approved.
Pre-approval requires the
home-shopper to fill out a loan application and provide supporting pay stubs,
bank statements, employment information and W-2 forms. Lenders charge for the
service -- generally from $20 to $50 -- but it's worth it. Pre-approval puts you
in the strongest possible bargaining position with sellers and their real estate
agents. Those who are in a hurry to move a property often will accept a lower
bid from a pre-approved buyer because they can be certain the deal will go through.
Check out ARMs
Short on cash? Consider an adjustable-rate mortgage. ARMs feature
lower monthly payments at first, something that might help marginal buyers get
into a home.
"When you see interest rates going up, a lot of the
adjustable-rate mortgages actually become more affordable at that stage in the
game," says Peter Goldberg, senior vice president of Ohio Savings Bank in
Cleveland. "Ultimately people look for that lower payment and ARMs can really
provide a lot of that."
Based on Bankrate.com's weekly national survey
of lenders, the interest rates offered for ARMs tend to be about 1.5 to 2 percent
lower than the average 30-year-fixed rate. Someone borrowing $150,000 on a one-year
ARM at 5.47 percent would have monthly payments in the first year of $849. The
same-sized loan with a 30-year fixed-rate mortgage at 7.01 percent would cost
$999 a month.
If the one-year ARM's annual adjustment is too volatile
for your tastes, some relatively new adjustables offer initial fixed periods that
endure longer. Consider a longer-term ARM, such as a 5/1 or 7/1 that features
an initial fixed period of five years or seven years. You'll pay a little more
in interest than for their one-year counterparts, but less than for a 30-year
fixed-rate loan.
Float a balloon
Balloon loans are another option
available to get a lower payment in the first few years. These mortgages charge
less interest upfront for a set time frame, but require the borrower to either
refinance at the end of that period, pay off the loan or convert it to a fixed
payment schedule.
On a seven-year balloon loan, a borrower might make
payments of principal and interest for that period of time. Assuming rates didn't
shoot up more than 5 percent in the meantime, they might then be able to pay just
$250 to roll the loan into a fixed schedule for the last 23 years.
Buy
down the rate
If you've got the cash now and want to lower your payments,
you can "buy down" your mortgage rate.
It's a simple concept,
really: In exchange for more money upfront, lenders are willing to lower the interest
rate they charge, cutting the borrower's payments.
Buydowns can be temporary
or they can last the life of the loan. The purchaser can negotiate the deal directly
with a lender, but sometimes a home seller arranges the buydown as an incentive
to attract buyers.
Look for builder incentives
Those looking to buy
a new home instead of a previously owned one may find that the builder will provide
the incentives. Alan Cohen, a branch manager with Irwin Mortgage Corp. in Indianapolis,
notes that companies in his market will sometimes offer a few thousand dollars
to consumers to put toward their mortgages. Someone can use that money to buy
down the loan rate for a couple of years.
"If you have a rate of
7.5 percent (on a 30-year fixed loan), you might find a buydown set up where the
builder will actually allocate the points, say three points," Cohen says.
A buyer could apply two points to the first year's payments and one to the second,
resulting in a 5.5 percent interest rate the first year, 6.5 percent the second
year and 7.5 percent all following years. "The lender will hold the funds
like a tax and insurance account, and every month they will draw down the difference
out of those funds like an escrow," he says.
That would help people
who don't have much money now but expect to earn more later. Others who want to
have a low rate for good can put the builder's money toward that end. Using the
same loan parameters, for instance, somebody could buy the rate down about three-eighths
to one-half of a percentage point for the entire 30 years, according to Cohen.
Article continued at http://www.bankrate.com/brm/news/mtg/20020417a.asp?page=default
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