6 ways to slash mortgage costs

Ready to plunk down your hard-earned cash for a slice of the American pie? Make sure your financing is low fat.

Buying a home is likely the most expensive, long-ranging financial commitment most of us ever make. The more homework you do before heading out with a real estate agent or before making an offer on a home, the more likely you are to stretch your mortgage budget.

Here are six ways to get the most bang for your money beginning before you step out the door to shop.

Get pre-approved

Get pre-approved for your mortgage loan, rather than just pre-qualified.

With pre-approval, the lender pulls a credit report, verifies a borrower's income and takes other preliminary underwriting steps to come up with a maximum allowable loan amount, which usually doesn't change. The lender also commits, in writing, to making that loan if a purchase occurs within a set amount of time. In a pre-qualification, the customer provides the information, but the lender doesn't check it and there's no assurance that the loan will be approved.

Pre-approval requires the home-shopper to fill out a loan application and provide supporting pay stubs, bank statements, employment information and W-2 forms. Lenders charge for the service -- generally from $20 to $50 -- but it's worth it. Pre-approval puts you in the strongest possible bargaining position with sellers and their real estate agents. Those who are in a hurry to move a property often will accept a lower bid from a pre-approved buyer because they can be certain the deal will go through.

Check out ARMs

Short on cash? Consider an adjustable-rate mortgage. ARMs feature lower monthly payments at first, something that might help marginal buyers get into a home.

"When you see interest rates going up, a lot of the adjustable-rate mortgages actually become more affordable at that stage in the game," says Peter Goldberg, senior vice president of Ohio Savings Bank in Cleveland. "Ultimately people look for that lower payment and ARMs can really provide a lot of that."


Based on Bankrate.com's weekly national survey of lenders, the interest rates offered for ARMs tend to be about 1.5 to 2 percent lower than the average 30-year-fixed rate. Someone borrowing $150,000 on a one-year ARM at 5.47 percent would have monthly payments in the first year of $849. The same-sized loan with a 30-year fixed-rate mortgage at 7.01 percent would cost $999 a month.

If the one-year ARM's annual adjustment is too volatile for your tastes, some relatively new adjustables offer initial fixed periods that endure longer. Consider a longer-term ARM, such as a 5/1 or 7/1 that features an initial fixed period of five years or seven years. You'll pay a little more in interest than for their one-year counterparts, but less than for a 30-year fixed-rate loan.

Float a balloon

Balloon loans are another option available to get a lower payment in the first few years. These mortgages charge less interest upfront for a set time frame, but require the borrower to either refinance at the end of that period, pay off the loan or convert it to a fixed payment schedule.

On a seven-year balloon loan, a borrower might make payments of principal and interest for that period of time. Assuming rates didn't shoot up more than 5 percent in the meantime, they might then be able to pay just $250 to roll the loan into a fixed schedule for the last 23 years.

Buy down the rate

If you've got the cash now and want to lower your payments, you can "buy down" your mortgage rate.

It's a simple concept, really: In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments.

Buydowns can be temporary or they can last the life of the loan. The purchaser can negotiate the deal directly with a lender, but sometimes a home seller arranges the buydown as an incentive to attract buyers.

Article continued at http://www.bankrate.com/brm/news/mtg/20020417a.asp?page=default

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