Realtor.com
There’s a difference between a home that fits your budget and one you can actually afford.
You may have a number in mind for how much you want to spend on a house—and you may have even found a home for that number. But the list price is hardly the final price tag. Even if you plan to only put down 10% for a down payment, other fees such as property taxes, closing costs, and insurance can push your upfront expenses and ongoing costs higher than expected. Quickly, a home that falls just within your price range can fall just outside of it.
If you have found the house you love, it can be hard to let it go, even if the purchase does fall outside the 30% rule. Here are some strategies to help you minimize the costs around the edges that might keep you from buying your dream home.
Shop for better rates and explore buydowns
There is no one mortgage that fits all. Not only are there different loan types, programs, and terms, but there are also tactics and tools you can use to lower your monthly payments, even temporarily.
When buying a home, it’s important to do some mortgage shopping. Different lenders may offer you different rates, depending on how they calculate various factors such as your debt-to-income ratio.
Even a small difference in interest rates can add up over time. For instance, imagine a buyer takes out a $400,000 mortgage at 6.5% versus 7%. The monthly payment of principal and interest would be $2,529 as opposed to $2,661—a savings of $132 per month. Over 30 years, that adds up to about $47,500 in interest savings. In states where the cost of housing is high, loan recipients could save over $100,000 on 30-year mortgages by finding better rates.
Be sure to examine the types of loans available to you as well. Assess your eligibility for certain loans—such as those from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Department of Agriculture (USDA). Some loans may offer lower rates than conventional loans, or give you other breaks such as not requiring a down payment or private mortgage insurance.
Once you find the right mortgage for you, there are still some potential ways to save money in the long run. A mortgage buydown, where you pay extra upfront to lower your interest rate, can be a useful tool in some situations. You can do a temporary buydown—where the rate is reduced for a few years—or a permanent buydown that reduces your rate for the life of the loan. If you are able to obtain that cash upfront, such as from a family member or extra savings, you can save significantly on interest over a 30-year loan.
Find free or low-cost ways to bolster your down payment
One of the basic tenets of using a mortgage to buy a home is that the more money you put down, the less your monthly payments will be. Assuming you’ve exhausted the obvious avenues for raising money, what other options are available?
Start by researching federal, state, and local down payment assistance programs. First-time buyers, moderate-income buyers, and certain professions such as essential workers and teachers might be eligible for tax credits, low-interest loans, forgivable loans, and even grants. California’s CalHFA program offers deferred “silent second” loans that don’t need to be repaid until you sell, refinance, or pay off the home. NYC’s HomeFirst program offers up to $100,000 in down payment assistance for eligible first-time homebuyers.
In addition, there are ways to responsibly borrow from your retirement accounts to fund your home purchase. Taking out money from your IRA without an early withdrawal penalty is allowed for first-time buyers, up to $10,000. You can also give yourself a loan from an employer-sponsored 401(k) of up to $50,000.
There are risks and rules for using these tools, of course—you may need to repay certain loans if you sell or refinance too quickly, and borrowing from retirement accounts reduces your savings and potential compounding. But if these methods can help you avoid private mortgage insurance or cover closing costs, the trade-off might be worth it.
Don’t be afraid of negotiations and hacks
If the house you have your eye on really is the home of your dreams, it’s time to pull out all of the stops, and to get creative if need be.
For example, with guidance from your real estate agent, you can ask the seller for concessions to help close the deal. If the home has been on the market for a while or the sellers want a quick, hassle-free sale, you might request that they cover closing costs, make repairs or improvements, or pay HOA or condo fees for a limited time. While it may seem counterintuitive for a seller to agree to concessions, in some cases these compromises actually reduce their carrying costs, speed up the sale, and help them avoid having to lower the asking price. You won’t know until you ask.
Once the home becomes yours, smart ways to make up shortfalls don’t end there. Consider renting out part of the house, if possible, to offset your monthly payments, and always keep your eye on the market for the opportunity to refinance your mortgage at a lower rate.
When making one of the biggest purchases of your life, it pays to use all the strategies available. Every dollar counts: Money spent wisely on your house can free up funds for groceries, vacations, school, health care, and everyday living. If your dream home feels just out of reach, keep exploring your options—you might be only one additional loan application, state grant, or well-timed request to the seller away from securing the deal on terms that work best for you.