Is it possible to actually “pay more” to have less payment? In Real Estate lending it is absolutely possible. Mix a great Realtor® with a great Lender, and an open minded Buyer, and you may get just that, less payment per month to make the home more affordable!
There are many different lending products out there, and a Buyer should consult with a lending Broker to find out a best product for themselves, but don’t stop there…ask a lot of “what if” questions…like what if I offered more for a property and then ask the Seller to “buy down” my rate? Or What if I pay a higher interest rate and then didn’t need to pay a separate mortgage insurance on top of my monthly payment, which sometimes can cost several 100’s more.? What if I pay for repairing my credit and a rapid rescore to get a better interest rate, which would equal less in monthly payments? What if I took a shorter loan period, paid more per month, but saved YEARS of monthly payments?
Let’s explore some of these options, but first, let’s have a frank discussion about mortgage insurance…
What is Mortgage insurance, and why oh why do I need it? (This might be an answer like “because Uncle Sam says so” or “There is a price to pay for not having any skin in the game”) And while mortgage insurance makes sense…to the lender…it may not make sense to you and your cash flow.
So what is Mortgage Insurance? In simple terms, it’s insurance for the bank in case you decide to default on your loan. The more risk you are to the lender, the more they charge for this insurance. If you have excellent credit and a down payment, you usually don’t have this expense, however, often the lenders still buy this insurance on their own behalf, and you know that Banks won’t usually do anything for free. Zillow gives some tips here, but they don’t really cover the whole picture. Some lenders are offering to pay for the mortgage insurance, LPMI, and build it into your loan. This is reflected in a higher principal loan amount and a slightly higher interest rate, however, the difference is that you can usually take a tax benefit to help recoup some cost during tax time against your interest payment, which is not often the case with your Mortgage Insurance Premium payment. Most importantly, see your accountant, financial advisor, or CPA…this benefit is a moving target depending on legislation and current tax laws. For many reasons to avoid Mortgage Insurance, see what Investopedia has to say.
While Mortgage Insurance may not be a best bet, it can be necessary if you are planning on buying with little or no down payment. I have on some occasions, been able to assist our Buyers with negotiating a lessor payment instead by actually offering more for the sales price, and asking the Seller to use some of the additional proceeds to “buy down” the interest rate, or pay some of the Mortgage Insurance Fees on Buyer’s behalf. This can translate into less monthly payments for the Buyer, and make the home more affordable! Just be wary that this will impact property taxes over time, but usually by a very small amount.
The big idea here, is there are times when mortgage insurance may be necessary, but try to think outside the box on ways to avoid it or lesson the monthly pain it causes. To get the best scenario for your needs, ask a lot of questions, and use a Realtor® who can help you negotiate what might work best for your needs, working in tandem with your lender, and be able to offer some creative alternatives that can help you save big in the long run.
Other things you can do; Keep your credit clean and your score high. Save a down payment or discuss with family and close friends about ways they can assist with your down payment. The higher your credit score, the more down payment you have, and the more creative thinkers you have on your Real Estate acquisition team, the less you will pay in unnecessary fees, which could just buy you that new piece of furniture you might want in your new home, or help with other upgrades to make that home yours.