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I am a first time home buyer and any advice is greatly appreciated.

I am going to start shopping soon for getting a mortgage and I need to know what strategies I can use to avoid paying more than is necessary. I want to be smart about both shopping, as well as making payments.

Obviously a lower interest rate is good, but what other terms and conditions should I look out for?

  • How can I save money on my monthly mortgage payments?
  • What should I know about buying down my mortgage interest rate?
  • What sort of rebate or tax credit programs should I look for?
  • Do mortgage brokers have junk fees I can avoid or negotiate?
  • What kind of preparation should I do before I start shopping for a mortgage?
  • Do the payment plans the bank offer work, and are they a good deal? (For example all the flyers about making a payment every two weeks instead of once a month)
  • Should I worry about taxes and future taxes while I am shopping?
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No mortgage-holder anywhere in the world is going to let you pay your monthly payments via credit card and allow you to collect cash back or points or frequent-flyer miles or other rewards on the payments. There may be exceptions (for example, where the mortgage-holder is also the credit-card issuer), but if you are allowed to pay by credit card, you can be sure that you are paying for the privilege via a larger interest rate than you could have gotten otherwise. –  Dilip Sarwate Feb 23 '13 at 15:08
    
Happy to help. As you get into the mortgage process, you will likely have a million questions. Researching or asking them here will give you important knowledge as you deal with brokers. I am not calling brokers dishonest, but they are sales people. The more you know ahead of time, they more than can help you. –  MrChrister Feb 26 '13 at 18:34
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1 Answer 1

This answer will be US-centric but hopefully most of the information will be applicable to other jurisdictions:

Generally speaking:

  • Listen to those Credit Score commercials; just don't actually use their services. They are required to provide your credit report for free, without enrollment in any credit monitoring service. Get a copy and look it over carefully; look for anything that may be wrong, and work with the reporting agencies to get it removed. You want to go into the pre-approval process with the best possible credit score you can get.
  • Don't buy more home than you can afford, even if you think you'll need the extra space of a bigger home. The less expensive the home, the less you'll pay in monthly mortgage. You'll be surprised how many kids you can stuff into two bedrooms while maintaining relative comfort.
  • In this housing market, if you can't get a mortgage without any points, you're either not looking hard enough or you probably shouldn't be looking. A "point" is 1% of the principal payout of the loan, paid up front to the lender, usually in return for a break on the interest rate. Sounds good, and it can be worth it if by paying a point you get a 1% deduction in interest rate (you're basically pre-paying at 1% for one year, to get a reduction for the other 29), but if you have good credit you shouldn't need to accept points to get a really good rate (prime mortgage rates are in the high 2% to low 3% right now). If you can't get a mortgage with no points attached, get a copy of your credit report and credit score and make sure there aren't any major problems.
  • Try to bring the full 20% of the purchase price to closing as a down payment; bring more if you can. While options exist, at least in the U.S., for homebuyers to bring as little as 3.5% to closing, all of them are "less now, more later" options that will increase your monthly payments, at least for a while, in the form of higher rates on secondary loans, and/or MIP payments on FHA loans.
  • A 30-year term will lower your monthly payments, but increase your total cost of capital; not only will the rate be higher, you'll be paying it on more money longer. If you feel comfortable with 15-year terms, seriously consider it. At the very least, if you get 30-year terms, make extra principal payments as you can afford them.
  • Some banks will allow you to make biweekly payments, each payment being half your normal monthly payment. This does two things; first, you're making 26 half-payments per year, equating to making 13 monthly payments which is an extra principal payment per year. Second, if the lender applies the half-payment when it comes in as if it were a normal payment (calculating interest as of the payment date, paying that, and applying the rest to the principal; this is a big if in the U.S. as they generally do not have to), then for the next two weeks you're saving the interest that would have accrued on the principal portion of the previous payment. If you're paid bi-weekly, this can help normalize your discretionary income from check to check as well, but this is usually a relatively minor concern if you have a buffer (6 months' expenses is recommended, but even 1 or 2 months' worth will smooth out these bumps).
  • Understand that in the U.S., for the mortgage interest deduction to be worth it to you, it must, when added to other itemizable deductions, end up being substantially more than your standard deduction. You get personal exemptions for everyone in the house who isn't claiming themselves no matter which way you go on deductions, but you also get your standard deduction and your spouse's, which you give up if you itemize. The magic number for an MFJ return in 2012 was $11,900; if your total expenses for mortgage interest, MIP, property taxes, state and local income taxes (or sales tax), and charitable contributions were less than that number, and you didn't have any other big-ticket expenses (like having a kid; insurance doesn't pay everything and everything you have to pay out of pocket is deductible), then you don't really get a tax benefit from owning a home. The upshot is to consider this aspect when deciding how much home to buy; you either want the deductible portions of your payment to substantially lower your taxes, or you want to reduce those charges as much as you possibly can because they're not helping you on the Schedule A.
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+1 for a comprehensive answer. I will add to the next-to-last bullet point: DO NOT sign up for third-party services that will offer to convert your monthly payments into semi-monthly payments for a small upfront or annual fee. You will not save any money with them. The gain from making half the monthly payment twice a month is very small, and will be swamped by the fee. The gain from making biweekly payments, as KeithS recommends, is considerable. Many beginners cannot tell the difference between biweekly and semi-monthly payments and rip-off artists prey in them. –  Dilip Sarwate Feb 22 '13 at 2:03
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If you're going to say something like the following, AT LEAST give some sort of ballpark number: You'll be surprised how many kids you can stuff into two bedrooms while maintaining relative comfort. –  Phil Sandler Feb 26 '13 at 22:37
    
My basic point was that giving each child their own room is, frankly, a luxury. As far as numbers, it depends on the size of the room, how you furnish it, and the relative age of the kids, but you can at least double up, meaning that a three-bedroom house can handle at least a family of 5 (two of one gender, and a third of either gender), and up to 8 is possible with large rooms and evenly-split kids. A four-bedroom house would be ideal but it isn't necessary until you have more than about three of one gender or at least one teenager (who's going to be loudly clamoring for their own room). –  KeithS Feb 26 '13 at 23:14
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+1 - comprehensive. I'd review the last paragraph, you started with "for the mortgage interest deduction to be worth it to you, it must end up being substantially more than your standard deduction" which was not quite 100% and clarified nicely further along. With rates so low, the extra savings from this deduction are minimal anyway. As you said, one should add it all up to see if they are over the STD deduction or not. –  JoeTaxpayer Feb 27 '13 at 3:18
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If you pay your mortgage biweekly but you're paid monthly, just be aware that there will be two months each year when you make three biweekly mortgage payments instead of two, which may have bad implications for your cashflow. There's a downside to making 13 monthly payments each year. –  Mike Scott Apr 10 '13 at 17:11
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