How to Lower the Cost of Your Home Loan

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After working with your lender to determine your borrowing limits — either during pre-approval, or when applying for your loan — you may discover that you cannot or are not willing to borrow as much money as you had originally planned.

Here are some reasons you may be having second thoughts:

  • The payments are higher than you’d expected.
  • The interest rate is higher than you’d planned for.
  • You hadn’t included interest, taxes, insurance, HOA dues, or other long-term costs.
  • Examining your full financial picture has revealed problems you weren’t aware of.
  • The reality of signing on the dotted line has given you second thoughts about the size of the financial commitment you’re willing to make.
  • You realized you haven’t planned for other contingencies, such as an unexpected illness, loss of a job, or a loss of value in your other investments.
  • You realized that borrowing so much for a home purchase would prevent you from making other investments, planning for retirement, or enjoying a balanced lifestyle.

These are all valid reasons to reconsider your home purchase. Talk your concerns over with a good financial planner. You may even decide that you’re just not ready to buy a home yet.

Or you may decide that you still want to buy a home, but you need to find a way to do so without borrowing quite as much money. What are your options?

1. Increase Your Down Payment

If you want to buy a home, but you’re uncomfortable borrowing 80% or more of the cost, you can try to find ways to increase your down payment. Are there other assets, such as stocks or bonds, which you can sell? Can you borrow against a 401(k) or other retirement account? Can you ask for help from a relative in the form of a gift?

If so, you can borrow less money by putting more of your own money down. But don’t forget the costs involved. Borrowing against your retirement account might help you buy a home now, but could severely impact your financial health later. Selling investments such as stocks or bonds may decrease your chances for lucrative future returns. Getting a gift from a relative may create a sense of obligation that strains your relationship with that other person. You may also be required to pay taxes on the gift.

2. Buy Less Home

Another option is to simply lower your target price range. While it can be tempting to buy a home at the top of your range, a more modest home may be a better financial fit. A less expensive home may also offer you the chance to build “sweat equity” by adding improvements; finishing a basement, making repairs, or adding a room to the original structure. In fact, many of the improvements that can raise a home’s price by tens of thousands of dollars can be completed yourself for far less money.

3. Get Seller Concessions

A third option is to request concessions from the seller of your home. This doesn’t mean getting a home’s seller to lower the price of the home, but rather, to get them to pay fees or to buy points that can lower your interest rate.

Seller concessions can help you save significant amounts of money on the purchase of your home, but you won’t begin negotiating for them until after you’ve made a purchase offer. Keep in mind, however, that you’re paying interest on the full amount of the loan, even if the seller “refunds” some money to you in the form of concessions.

For example, if you take out a mortgage for $300,000, and the seller gives you a concession of $10,000, you might think that it’s the same as getting a mortgage worth $290,000. But remember, as far as the lender is concerned, you borrowed $300,000, and that’s the amount you’ll pay interest on for the life of the loan. And the interest on $10,000 over a 15 or 30-year period is nothing to ignore, even at a low interest rate.

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Mia Simon is a Redfin real estate agent in Silicon Valley. Mia is an experienced real estate agent and expert negotiator.

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