In case you haven’t heard, interest rates are still hanging in there in the mid-4 percent range for a 30-year fixed, and home prices are rising.
If this spring is your time to make the move to buy a home, then there are some general rules of the road you might like to know. For starters, you generally have to have a minimum of 3 to 5 percent of your purchase price, and for many that could be a stretch.
So, how do you stretch your home buying dollars? There are a few tricks that might prove useful, particularly if you are a member of the down payment challenged group.
First, consider asking the seller to pay some or all of your loan and purchase closing costs. You may end up paying a slightly higher price for the property so that the seller can net the same amount, but it can radically reduce the money you need to bring to the closing table. Sellers generally can pay up to 3 percent of the purchase price toward your closing costs.
Let’s say you have about $12,000 saved up. If you buy a $400,000 property and get a 97 percent loan ($388,000), then you normally will bring your $12,000 plus assorted closing costs which could run another $3,500 plus transfer taxes if applicable and pre-paids for your hazard insurance and tax escrows, or may be somewhere in the $5,000 to $6,000 range or a total of about $18,000.
So, it would appear you would be a bit short. But if you agreed to pay the seller $406,000 and in return asked the seller to pay $6,000 of your closing costs, then you can base your 97 percent loan on the higher price and you would need to bring about $12,185 to the closing table. Most moms and dads would be happy to slip you the extra $185 to buy your first home if you needed it. Of course the property has to legitimately appraise at the higher price to justify the whole deal.
Here is another idea to cut your closing costs. Most mortgage rates (including mine in the “at a glance” section) are quoted with a no origination fee and no lender credit toward closing costs, or what we call a “par” rate.
What many people do not realize is that if you agree to a higher rate, then the lender will give you a credit on your closing costs in relation to how high the rate is you select. The trade off is you bring less money to close but have a slightly higher monthly payment. For example, if you agree to a rate that is 1/4 percent higher than the par rate, then the lender might give you 1 percent or more as a credit toward closing costs.
This means that it will take roughly four years of higher payments to equal the 1 percent savings up front.
In some cases if you agree to an even higher rate, then the lender will assist you with paying or waiving some of the closing costs. The trick is to weigh the higher payment against how much you would save.
Another aspect of buying a home is that you may not get the price you want, but stop and consider if a few thousand dollars difference is really worth walking away from the deal. At 4.625 percent, your payment works out to be $5.14 per thousand of your loan amount. If you and the seller were $5,000 apart, then your payment would be only $25.70 per month higher. Over five years you will pay a total of $1,542 in extra payments, part of which is principal and the rest is tax deductible interest.
There are loan programs that allow for 100 percent financing through the USDA, but these loans do have significant limitations on who can qualify for them. One cannot own any other properties or make over a certain level of income.
If you put off buying even for a few months, then you may end up with a property that costs even more, and you will have lost your tax deductions you would have accrued during that period. Suddenly that money you saved really isn’t a savings at all.
Chris Neuswanger can be reached at Macro Financial Group in Avon at 970-748-0342 or via email at firstname.lastname@example.org. He welcomes mortgage-related inquiries from readers. His blog and a collection of his columns can be found at www.mtnmortgageguy.com.