FDIC Consumer News
Saving Money on a Mortgage, From Start to Finish
For many consumers, their mortgage is their biggest expense. Here are tips — for prospective borrowers as well as current homeowners — on ways to save money on a mortgage.
Comparison shop for your loan and don't be afraid to try to negotiate the interest rate as well as the fees. Start by getting quotes from different lenders based on the Annual Percentage Rate (APR), which factors in the interest rate as well as certain other finance charges you have to pay to obtain your mortgage. Those costs include "points" paid to the lender (each point equals one percent of the loan amount), fees paid to mortgage brokers, and certain other charges expressed as a yearly rate.
However, not all closing costs are included in the APR. Common examples include fees for a property appraisal (typically paid to an independent contractor hired by the lender) and a title search (which can discover potential claims that others may make regarding the property, such as for unpaid home repairs or real estate taxes).
"Because closing costs that are not included in the APR can vary widely, consider comparing both the APR and the total dollar amount you would need to pay at closing," advised Luke W. Reynolds, Chief of the FDIC's Outreach and Program Development Section.
Understand which third-party settlement services you can shop for. Although lenders may require you to purchase certain services from a specific company (often the case with property appraisals), you may be able to use any company that meets the lender's approval for other services. And while some settlement services may be relatively inexpensive, others can be hundreds or thousands of dollars.
"Consider comparing the prices of several companies as far in advance of the closing as possible," Reynolds said. "That's so your lender has time to review and make arrangements with the company you want to use."
In particular, he said, carefully research your options for title insurance, which can protect the homebuyer from losses due to a flawed title search and other related claims. "Title insurance prices can vary considerably," Reynolds added. "Also be aware that there are different levels of title insurance protection. Compare the insurance packages from several companies and choose the coverage you want."
For guidance on how to shop for title insurance and avoid potential pitfalls, see tips from the National Association of Insurance Commissioners at www.naic.org/documents/consumer_alert_title_insurance.htm.
Finally, if you are buying a new home directly from a builder, don't automatically assume that you need to — or should — purchase your loan-related products from the builder's preferred providers. "Buyers often believe that they will get the best deals from the builder's settlement companies and lender, but the only way to be sure is by comparison shopping," said Ron Jauregui, an FDIC Community Affairs Specialist.
Determine whether you can save money by refinancing into a new, fixed-rate mortgage. Start by contacting your loan servicer (the company that collects your loan payments) to see if you can refinance your mortgage, preferably at little or no cost. Options may include the federal government's Home Affordable Refinance Program (www.makinghomeaffordable.gov), which is for borrowers who are not behind on their mortgage payments but could have trouble refinancing because the value of their home has declined.
"Keep in mind that a lender may offer to add closing costs to the balance of your new loan so that you don't have to pay them upfront, but it means you'll be paying more money in interest," Reynolds noted.
Regardless of how you refinance, look for a new loan that you would pay off at approximately the same time as your current mortgage. "A longer-term mortgage might lower your payments, but you could pay considerably more in interest," Reynolds noted.
He also suggested checking with a housing counseling agency approved by HUD, the U.S. Department of Housing and Urban Development (1-800-569-4287 or www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm), or an attorney before you refinance to make sure you won't lose any legal protections tied to your current mortgage. These safeguards could be especially useful if, in the future, you face the loss of your home because of payment problems. They include, for example, legal defenses against you being held responsible for the difference between the amount your home sells at a foreclosure auction and the balance of your loan.
Instead of refinancing, consider paying off your existing mortgage faster.You may be able to save tens of thousands of dollars in interest — depending on the amount of your loan and the interest rate — by paying a little extra toward your mortgage. For example, on a $100,000, 30-year mortgage with a 5 percent rate, sending in an extra $30 a month could pay off your loan more than three years ahead of schedule and save you more than $12,000 in interest. Ask your lender about different ways to pay off your mortgage early without paying additional fees or having to refinance.
Don't overpay for homeowner (hazard) insurance and property taxes. Being underinsured can be a costly mistake, but that doesn't mean you can't save money. For example, having the same insurer cover your home and your car may earn you a discount. Consider the rates that insurers offer you directly as well as what independent agents (who represent several different companies) can obtain. For more money-saving strategies, go to your state insurance commissioner's Web site (start at www.naic.org/state_web_map).
Also, review your property tax statement to make sure it accurately reflects the size and characteristics of your property. Find out if you are paying the lower tax rate that may be available for owner-occupants.
If you are having trouble making your mortgage payments, don't wait to seek help. Contact your loan servicer or a HUD-approved counselor, ideally before you miss a payment. And, if you're having trouble getting assistance from your servicer, new federal rules require your servicer to be more responsive to various customer complaints, "including providing accurate information to mortgage customers wanting to avoid foreclosure on their home," noted Sandra Barker, an FDIC Senior Policy Analyst.
If your mortgage servicer is not responding to your request for assistance, you can file a complaint with the CFPB at consumerfinance.gov/complaint.
For information about recent mortgage rule changes to protect consumers from risky mortgages and help borrowers better manage a home loan, see Coming Soon: New Mortgage Rules Borrowers Should Know About. And stay tuned for information on rule changes coming August 1, 2015, which will require key information about mortgage costs to be disclosed to loan applicants.