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Get It Done: Save Thousands on Home Financing

Whether it's your first home loan or you're refinancing an existing one, new mortgage are costly. The average homeowner pays 3% to 6% of his outstanding principal for a new loan. But you do have options when you're shopping for a mortgage. Here's how to get some leverage and use it.

Start shopping
A mortgage broker can be a valuable asset, especially for anyone who has credit problems. And even if your credit is good, using a broker can simplify cost comparisons since you're shopping the brokers' fee, not lenders' settlement costs. If you go this route, hire an up-front mortgage broker who discloses fees in writing at the outset.

For non-brokered deals, use competing bids to negotiate. And if you're refinancing, don't automatically dismiss your current lender: It's more efficient (and cheaper) for it to hang onto your business. If the bank servicing your loan isn't your original lender, even better. It paid to acquire your mortgage; it has more incentive to keep it.

A detailed cost-benefit analysis is critical. There are a number of factors you'll have to consider, but don't be daunted -- given the size and importance of this transaction, your homework will pay off.

No-cost loans? Not so fast
You'll likely run across lenders offering "no-cost" mortgages. That's not the same as "free." It just means expenses are baked into the transaction -- either via a higher interest rate or rolled into the amount of the loan. If it's the latter, it could affect your ability to deduct the costs from your taxes, plus you'll pay interest on the added amount for the life of the loan.

A no-cost mortgage or refinance is best for borrowers who will hold the mortgage for no more than three or four years, says Jack Guttentag of mtgprofessor.com. If you plan to sell or refinance in that time, be sure to include the costs in your calculations.

How to cut costs
According to a 2007 Bankrate.com survey, the average homeowner pays $2,736 in closing costs (not including taxes, escrow, or other governmental fees) on a $200,000 loan.

The real negotiations begin once you get a good-faith estimate (GFE) from the lender. The key word is "estimate": You won't see the actual costs until you get the HUD-1 three to five days before closing.

Even though they're boring, make sure you familiarize yourself with these documents well before you see the final drafts. The earlier you identify any fee-padding or bait-and-switch techniques, the more leverage you'll have to negotiate or walk away from the deal.

Your best shot at cutting costs is not with the third-party fees (those paid to title companies, lawyers, and county tax offices), but with the lender's line items (points and application, administration, and processing fees). And unless you see something really egregious (like a $200 credit check fee), concentrate on the big-ticket items.

Start with the yield spread premium (YSP) -- the rebate paid to the lender or broker -- which is typically 1% to 3% of the loan value. It can be called a number of things on the GFE, such as "loan origination," or "lender" or "broker" fee. (The average outlay for "lender fees" is $1,114.) Shoot for 0.5% to 1% if you're a good credit risk. Negotiating from 3% to 1% on a $200,000 loan puts $400 in your pocket.

The next biggest line item is title search and insurance (average $707). If your original loan is less than two years old, ask for the "reissue rate" -- which should be 50% to 70% less than the original policy (at least $353 in savings). Even if you bought five years ago, ask for a discount.

Other items like the application fee (average $425) are also negotiable because they are usually there to cover the lender's costs if you back out. And if you really want to get into the weeds, look into "document prep" ($187), "underwriting" ($247), and "processing" ($371) fees.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 03, 2008, at 2:37 AM, bcranda wrote:

    re-finance costs can kill you. Just went with a home equity loan with little to no loan fees and got a lower intrest rate to boot, down side was I was only able to finance for 15 yrs but will save thousands in intrest and loan fees.

  • Report this Comment On July 16, 2008, at 3:15 PM, silentflyer wrote:

    bcranda

    is your rate fixed? Most HELOC are fixed to an index rather than a given rate. Variables on HELOCs are mostly low for the time being but distant drums are beating a cautious tune...

  • Report this Comment On January 29, 2009, at 3:13 AM, pgioffre wrote:

    You can save money on financing but here is something alot of people dont know. You can use flat fee mls sites like http://www.listingflatfeemls.com to save a HUGE amount when you sell.

    Good luck fools...lol

  • Report this Comment On May 31, 2009, at 6:26 PM, sanibelbones wrote:

    We bought from a couple that had used a "flat fee" MLS realtor. They got what they paid for. Our realtor wound up doing more work to cover the gaps.

  • Report this Comment On October 12, 2009, at 7:23 PM, hassem wrote:

    At the risk of opening the flood gates, can anyone recommend the path of least resistance (meaning mortgage bankers & others who have common sense) in seeking mortgage consolidation for someone with non-traditional income.

    I'm not looking for sympathy (I realize I've been lucky in life), but my biggest mistake was retiring at 53. Now I'm trying to explain stock grant vesting cycles and 10-year deferred income streams. I'm making little progress, am about to give up, but still think its worth one more try to save $200-$300/month.

    Any ideas or suggestions.

  • Report this Comment On July 06, 2011, at 12:15 AM, BookCzar wrote:

    I personally Love all the doom and gloom. When there's blood in the water...right? The age old adage is that we should invest when no one else wants to. But why is it so difficult to do? How many of us bought Citi when it dipped under 1 dollar a few years ago?

    Real estate is definitely not like it was 4 years ago, but it is now a good opportunity again. With companies like www.capitalira.com now allowing for investing through an IRA, we are going to see an even larger market for real estate investing.

    I know there's a lot of reason to avoid real estate, that's why Im so interested.

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