Haley and I bought our first house last November. While there was plenty of stress, we were incredibly fortunate in that we were able to get a home loan with a ridiculously low APR. And while our deal was good, there are some tricks we missed that mean that you could do even better.
1 way we were fortunate
It doesn't hurt me to admit it. We had access to Navy Federal Credit Union (NFCU) and its awesome mortgage rates because Haley's father is a retired sailor. That set up a situation in which we were primed for success because NFCU could offer us a lower interest rate than anyone else -- by a mile. In fact, the gap between NFCU's initial offer and the next-nearest lender was about $36,000 in reduced interest charges.
We still negotiated with the other lenders to see how close they could get to NFCU. And they were able to get fairly close; the next best offer was able to reduce our benefit from going with NFCU to "only" about $7,200 in interest savings.
Of course, we still went with NFCU because $7,200 is a nice chunk of change. Unfortunately, because we were new at this whole home-buying thing, we didn't think to ask for them to cover any closing costs. After all, they were the best offer we had available to us, so we didn't push.
But you could -- and should.
How we could have done even better
See, this is one of those moments when the time value of money could come in handy. After all, $1,000 today is worth more than $1,000 paid out a year from now because you can use that $1,000 to make more money. And in fact, $1,000 today is quite possibly worth more than $7,200 paid out over 30 years.
Consider this: The stock market has historically returned around 7% after inflation. If you invested $1,000 today and held for 30 years at a 7% annual return, that $1,000 would be worth...$7,612.55. Of course, once you subtract capital gains taxes (assuming a 15% tax rate -- good if you make under $479,001 as a married couple), then that shrinks to $6,620.67. If you made that investment in a Roth IRA, of course, then no capital gains taxes would mean you get to pocket the full $7,600 and change.
So, if I could turn back time, I'd have handled the conversation with the various loan officers a little differently. I would have asked the other lenders we were considering whether they could offer closing credits to see if any would provide, say, $2,000 toward closing -- and then I would have shared the above calculation with NFCU and seen if we could get them to match the offer.
Make your own fortune
You can't count on necessarily having access to a low-cost military lender when buying your first -- or next -- house, although NFCU is pretty generous in extending membership to service members, veterans, Defense Department employees, and their families, including parents, grandparents, children, grandchildren, and siblings. Yet even if you can't get such a loan, you can still find a good deal. When we were doing research, we found plenty of online mortgage lenders that gave very attractive terms; because of their lower cost structure, they're able to generate a solid profit even if they price things lower. You can get that quote and use it as a lead-in to a conversation with a local lender to see what kind of personalization (read: lower fees) you can get.
After all, after some bargaining from us, they got pretty close to NFCU in our case. Armed with better information and a plan, who knows what kind of deal you could get?