When buying a new home, you probably have a "To Do" checklist longer than a loan application. But there are a few things you should put above "Do Happy Dance in Front of Co-workers who Rent."
Like "Find Ways to Save Money."
The good news is there are several ways you might be able to save a little green. From major moves like refinancing your mortgage, to more humble acts like bundling your Internet and cable with one company, the savings potential for new or prospective homeowners is big.
So, before putting on your dancing shoes, check out these five tips that could help you save.
Tip #1 - If You Can, Get a Shorter-Term Mortgage
If you’re still shopping for mortgage loans, or if you’re already thinking of refinancing (replacing your existing loan with a newer one), choosing a 15-year loan term - rather than a 30-year term - could be a smart financial move.
This means you could pay off your house in 15 years instead of 30 years. And that has some advantages, as well as some challenges.
On the plus side, a 15-year loan typically means a lower interest rate, says Fred Arnold, a member of the National Association of Mortgage Professionals (NAMB) board of directors. He says most lenders offer a rate that’s at least a half percent lower than the rate for a 30-year loan. This means you could pay much less in interest over the life of the loan.
How much? Here's one example:
If you borrowed $250,000 for 30 years at 4.5 percent, you would pay $206,016.78 in interest over the life of the loan, in monthly payments of $1,266.71. However, if you borrowed $250,000 at 4.0 percent for just 15 years, your monthly payments would rise to $1,849.22, but the total amount of interest would only be $82,859.57. That’s a savings of more than $120,000...a good chunk of change, wouldn’t you say?
As for challenges, because you are paying off the loan in half the time, your monthly payment will be higher, as the example above shows. So be sure you can afford it. And if you’re comfortable with it, Arnold says you could be on a strong financial path.
"Your payments might be higher, but it requires you to be disciplined and in many cases that’s how people become very wealthy," says Arnold, who adds that if you can’t afford to go all the way down to a 15-year loan, there are also 20- and 25-year options from some lenders.
Tip #2 - Get Rid of Your Private Mortgage Insurance (PMI)
If your down payment was less than 20 percent of the value of your home, it’s very likely your lender required you to buy private mortgage insurance (PMI), a policy that protects any losses the lender might take if you don’t make your loan payments.
And unfortunately, the PMI isn’t cheap. According to a mortgage consumer guide published by the U.S. Federal Reserve System, which oversees national monetary policy and banks, PMI could cost anywhere from $50 to $100 per month.
Wouldn’t it be nice to get rid of that? Good news: you can. The first way, of course, is to put 20 percent down when you buy a house. But if you couldn’t or can’t, don’t worry, you still have a shot at losing the insurance.
According to the Federal Reserve, when you make enough payments to gain 20 percent equity in your home (based on the original purchase price), you can send a written request to your lender to cancel the PMI.
The Federal Reserve adds that federal law requires your PMI payments to automatically stop once you reach 22 percent equity in your home - again based on your original purchase price and with a clean payment record.
Finally, you should know that PMI is different than LPMI, which stands for lender's private mortgage insurance. Some lenders buy LPMI and charge you a higher interest rate to cover the expense. According to the Federal Reserve, this type of insurance does not automatically cancel; instead, you must refinance your home to possibly get rid of it.
Tip #3 - Shop for the Best Home Insurance Rate
Buying a home is probably one of the biggest financial decisions you'll ever make. This means you should take some time to not only get the best rate on your home insurance policy, but also the best policy for your lifestyle and home.
Keep in mind that this is the insurance that protects you against financial loss from such things as theft, fire, flood, and other liabilities on your property. So, it’s important to get the right policy.
To do so, there are some key things to take note of.
To start, it’s important to purchase enough insurance in the event of a total loss of your home, says the Insurance Information Institute (III), which provides insurance information to the public, media, and government regulatory agencies. In addition, they say, remember that your home insurance also covers your possessions, so include them in your estimate.
Then once you get that all squared away, you need to make sure you’re getting the best rate possible. One way to do this, says the III, is to take the highest deductible you feel comfortable with. The deductible is the amount you pay out of pocket before your insurance kicks in.
For instance, the III says in their Home Buyers Insurance Checklist that "Since most people only file a claim every eight to 10 years, having a higher deductible saves money over time and preserves your insurance for when it’s really needed."
Tip #4 - Consider a Home Contractor for Some Projects, But Not All
We know. Your new home is great...but you want to make it even greater with some do-it-yourself (DIY) projects. After all, if you provide the sweat, you'll save a lot of money, right?
Well, maybe. Unless you’re a builder yourself, you might be in for sweat, tears, and a more expensive project. That’s why you may want to consider hiring a contractor.
But what’s to fear about not hiring a professional and doing it yourself?
"The unknown," says Dean Herriges, president of the National Association of the Remodeling Industry (NARI). "The unknown that is obvious to a professional but is not to the average layperson can cause a lot of problems for people trying to tackle a project themselves."
He says that often, the new homeowner will open up a wall and inadvertently create a major electrical, plumbing, or structural problem. Then, it’s going to cost even more than the original project to get a professional to fix it.
He adds, however, that there are some projects that are well within the skill set of a non-tradesman, including small roof repairs and paint jobs. As for the rest, think long and hard before deciding to tackle it yourself. Because really, wasn’t finding and buying the house stressful enough?
Tip #5 - Consider Bundling Your Internet, Cable, and Phone
There's nothing like watching that first big game in your own home. But before you call the cable company, there are a few things you should know, especially if you plan to use the same company for two or more of your digital services—also known as bundling. And if you do it right, bundling could save you some money, says Consumer Reports Magazine Senior Editor Jeff Blyskal.
First, he says to remember that the cable company saves money when you bundle because they only need one cable to deliver your cable TV, Internet, and home phone services. Bundling these three services is typically called the "triple play," and it stands to reason that you should pay less for that than if you ordered each service individually. In fact, Blyskal says the savings could run from 40 to 60 percent, depending on your area and the amount of competition.
However, if you don’t need a home phone (the third part of the triple play) and decline the service, don’t expect as big a discount on the other two services. You should still enjoy some savings, though, says Blyskal.
Unfortunately, though, this discount usually only applies for a limited time, typically anywhere from six months to two years, he says. So, bargain hard now for the longest term at the lowest rate; this is when you have the power since they want your business.
- Private Mortgage Insurance