Looking for ways to save money on what may be the biggest financial transaction of your life? Here's a little advice for dealing with mortgages.
You might "assume" the existing mortgage on the house you're buying, if there is one. This is a good deal if the existing mortgage is at a lower rate than prevailing interest rates. To do this, you'll need to make sure the existing mortgage is "assumable," or transferable. And you'll have to cough up whatever difference there is between the purchase price and the outstanding debt. You might do this by tapping your nest egg, if it's large enough, or by taking out a second mortgage.
Another strategy is seller financing. Here, you make your monthly payments to the seller, not to an institutional lender. The advantage is that you can often arrange a lower interest rate -- especially if the seller has had trouble selling -- and you avoid the many costly administrative fees involved with institutions. (If the seller has had trouble selling, though, find out why!) In addition, you avoid private mortgage insurance.
Why would a seller take on this kind of risk? It's actually not that risky. The house is the collateral. Default on the loan, and the seller keeps the house -- just as a bank would. Sellers might also appreciate getting regular checks from you over time, rather than a lump-sum payment -- it'll be an additional income stream. And, depending on the seller's circumstances, this arrangement might also save him or her some capital gains tax. One caveat is that sellers typically will want a shorter term than the traditional 30-year mortgage.
You might also save some money by playing with points and other elements of the mortgage. Maybe pay more discount points and get a valuable lower rate. Perhaps consider a 15-year mortgage instead of a 30-year one. (Of course, if you'd rather pay less each month with a 30-year mortgage and invest the rest in something like stocks, it could be better than a shorter-term mortgage -- especially if your interest rate is low.)
It's also effective to pay off your mortgage sooner than you're scheduled to. The more you pay, the less you owe. And the less you owe, the less interest you'll pay.
Finally, remember that mortgage lenders want your business and will usually compete to get it. Don't be afraid to negotiate. Let one know what another is offering you. Don't assume that published rates are final. If your credit record is good, you'll be in a particularly strong position to negotiate. Knocking a quarter percent off a published interest rate is a reasonable goal.
You can learn all about how to buy or sell a home by visiting our Home Center, which features lots of money-saving tips and even some special mortgage rates.
You might also want to check out these articles:
- Buying a House Is Easy!
- So You Want to Be a Landlord?
- A Mover's Survival Kit
- 10 Things to Know About Mortgages
- 10 Home Enhancement Tips
In addition, drop by our Buying or Selling a Home discussion board.
And finally, if you're in the market for a mortgage, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some biggies:
- Capital One
- Washington Mutual
- Countrywide Financial
- Bank of New York
National City and Washington Mutual are Income Investor recommendations. This article was originally published on September 5, 2006. It has been updated by Joey Khattab, who does not own any of the shares mentioned.