How to Save Money on Your Mortgage Loan

 

This handy guide is designed to show you how you can save hundreds, if not thousands, of dollars on your loan closing costs and payments.

You can be sure that most mortgage lenders won’t bother to share these tips with you. But as you can see, there are plenty of opportunities for finding tremendous savings, whether your buying a home or refinancing your current mortgage loan.

Ask and Negotiate

You’ll get nothing unless you ask, and practically everything is subject to negotiations. As you speak with the various parties involved in your purchase and refinance process, don’t be afraid to look for bargains.

Keep in mind that although credit report and appraisal report fees are legitimate (but can be discounted), a lot of the other fees charged by mortgage companies can be rightly called “junk fees.”

If you use a mortgage broker, most of them are paid by the mortgage lender with whom they place your loan. When you get the good faith estimate (GFE), take a look at the entry for “Yield Spread Premium” or “YSP,” which is the commission that the lender is paying the mortgage broker.

The yield spread premium is usually a percentage of the loan amount and is typically based on your interest rate. So the larger your loan amount and the higher your interest rate, the bigger the YSP commission for your mortgage broker.  If it looks like your broker is getting a very big payment from the lender, you basically have an opening to save more money:

• Remove the junk fees. The mortgage broker can more easily absorb the junk fees, like loan processing fee and mortgage broker fee if they’re getting a big check from the end lender.
• Lower the interest rate. Aim for a yield spread premium of around 1.00% to 1.50% of the loan amount. If the stated YSP is a bit higher than that, then you know you have room to move on the interest rate.

Be Wary of No Closing Cost Loans

If it sounds too good to be true, it probably is. That is definitely the case with a lot of the “no closing cost” programs offered by many mortgage companies.

There will always be closing costs. The question is who pays them.

With many “no closing cost” refinance mortgage loans (and even some purchase loans), these no closing cost programs merely increase your interest rates. The mortgage company then uses the higher yield spread premium they receive from the end lender to pay your closing costs.

Unfortunately, this tactic basically finances your closing costs by rolling it into your mortgage loan’s interest rate and higher payments. So you’ll be paying more over the life the loan for your closing costs — a lot more.

As much as possible, you should try to resist the temptation of financing your closing costs. If you have the cash to pay your closing costs, do so. You’ll save thousands over the long run.

Plus, you have a better understanding of the true cost of your loan. That’s actually one of the reasons loan officers eagerly push financing of your closing costs, especially with refinances. It makes your closing costs seem painless, by taking your mind off the true cost of your refinancing.

Another, even more expensive way to finance your closing costs is to increase the loan amount. Now you’ll be paying interest on your closing costs, and both your monthly payments and loan amount are now higher.

Of course, if you’re short on cash, you’ll have little choice but to finance your closing costs in order to get your mortgage loan. However, you can still use the tips discussed in this section to slash your total closing costs by over 50%.

Recycle for Savings

A refinance loan can sometimes be just as expensive as a purchase loan.

But another way you can lower the cost is by going back to your original service providers from the purchase loan and arrange a discount.  This is especially true if you purchased your property within the last two or three years.

Here are ways to save on your closing costs by “recycling” some service providers:

• Appraisal report. You will need a new appraisal report for your refinance, because there’s a good chance that your property’s appraised market value has changed. However, as long as the appraiser who provided your last report is still licensed and in good standing with your state, then you can go back to them and offer them your business — in exchange for a discount on their rate. You will have to clear this with your mortgage lender. But they’re often okay with this, as long as your appraiser is not on their “black list” of unreliable appraisers.
• Title insurance. You’ll notice that your title insurance may double in cost for a refinance, over the purchase. That’s because during the purchase, the seller split the cost of the title insurance. One way to save money on title insurance is to contact the title company used in the purchase and negotiate a discount on their insurance premiums and closing agent fees, if you use them again. Again, you’ll have to clear this with your mortgage lender, but they should be okay with it.

You won’t need a new survey report for your refinance, but you may need to provide a copy at the closing.

Unfortunately, you cannot recycle credit reports. However, you should ask for a receipt for the credit report fee from your loan officer. A lot of mortgage companies will negotiate a lower cost on their credit report (as low as $15 with all three scores) and then pocket the difference from their “generic” estimate. By asking for a receipt, you can make sure that the actual amount indicated at the time of closing is the true amount.

Shop Around for Service Providers

Whether you’re buying a home or, you’ll have to deal with third-party service providers. These are all often-missed opportunities for additional savings.

One thing you need to understand about mortgage loans is that it has become a heavily uniform and repetitive industry. Unless you have a special situation or property, your loan processing and documents will be the same as everyone else’s. This uniformity means that there’s nothing very difficult about most mortgage financing.

With that in mind, here are some ways to save more money on your closing costs:

• Insurance. Shop around for hazard (homeowner) insurance quotes. Sometimes, though not always, you can get a good deal with the agent who insures your car.
• Attorney. You don’t need a real estate attorney on refinance loans, especially if you paid attention during your purchase. Plus, your closing agent will actually walk you through the refinance documents. You also don’t need an attorney for your purchase, but it’s highly advisable that you do use one. But do shop around. If your purchase is routine, most real estate attorneys have very little to worry about when handling your closing.

• Inspection. An inspection report is purely optional, but highly recommended — especially if you’re a first-time homebuyer. Still, you should shop around and negotiate the best price.

Because of the sharp drop in demand, many service providers are scrambling for business and are more eager to compete for yours. Use that to your advantage.

Points or No Points

You can lower your interest rates by paying discount points. But does it make sense?

The answer depends on how long you plan to keep your home. If you’re only planning to stay for a few years, then it doesn’t really make sense to pay discount points — especially when it usually takes several years to recoup the cost of those points.

If you’re planning to keep your home for the long run, then you may want to consider paying points — especially if you already have a low rate.  Keep in mind that the value of your rate-lowering discount points vanishes as soon as you sell the home or refinance.

So if current interest rates are high, you may not want to pay points… because you’ll probably refinancing soon once rates have dropped.

Time Your Closing

Finally, another way to shave a few more bucks from your closing costs is to time your closing for the end of the month. This will end up lowering your prepaid interest calculation.