The 6 Percent Solution: There is something called a seller concession that can save you money -- for example, if you agree on the price of the house at $200,000 and then ask the seller for a 6 percent seller concession. What this means is that you add (up to) 6 percent to the price of the house. That's right: You're now going to pay $212,000 for that house -- but the seller is going to give you that $12,000 back at closing. You're going to use that money to cover your closing costs.
If we pretend those costs add up to precisely $12,000, then what you've done is folded those closing costs into the mortgage. Points, title search, recordation fees have effectively been included in your mortgage. Since your mortgage interest is tax-deductible, these costs have effectively become tax write-offs.
In addition, you don't have to come up with all that extra cash at settlement. Your down payment will be slightly higher (if you're putting down 20 percent, then in the current example your down payment would be $42,400 versus $40,000), and of course, your mortgage payments will be higher, but it ends up saving you money. The seller has no reason to refuse this -- after all, the agreed-upon price is still the same.
What's the catch? The house has to appraise for the higher value. If the appraiser comes back and tells you that this house won't appraise for higher than $200,000, you can't do it.
Let's look into this a little further. Say you buy the house for $200,000. Your $40,000 down payment leaves you needing a loan for $160,000. You get a 30-year loan at 8 percent. Your monthly payments for principal and interest are $1,174.
Now say you decide to use the 6 percent seller concession strategy. You buy this house for the price of $212,000. You put down 20 percent, and this leaves you in need of a $169,600 loan. Your monthly payments will be $1,244, or $70 more per month. Is it worth it?
Initially, many people aren't going to feel an enormous difference between paying the extra $70 per month — not nearly as much as they would feel over having to fork out an extra $12,000 all at once. But what about the fact that you have to now pay this extra money over the course of 30 years? Well, over the course of 30 years, you're paying $25,200 more for that extra $12,000 ($70 more per month multiplied by 12 months in a year multiplied by 30 years = $25,200). However, remember that's $12,000 less out of your pocket at the time of closing. If you take $12,000 and invest it at 10 percent (less than the market average has returned over the past 35 years), your money will grow to more than $200,000 (before taxes) at the end of 30 years. So in this scenario, it's well worth it.
Naturally you'll want to run the numbers for your particular loan to see whether it would be worth it for you.
Remember: There are certain rules under certain mortgages that dictate what the seller can pay for at closing. If you get $12,000 from the seller and all your costs are $12,000, this does not necessarily mean you won't have to pay anything. Be sure to ask your lender which costs the seller may cover.
Assume an Existing Mortgage: One option is to assume the mortgage on the house you are buying. That's another way of saying you'll take over the existing mortgage on the house rather than getting a new one. This is beneficial if, for example, the existing mortgage has a lower interest rate. You can also avoid some of the administrative costs of taking out a new loan. In order to assume a mortgage, it must be transferable, and you must be able to pay enough cash (or get a second mortgage) to cover the difference between the purchase price and the outstanding debt.
Seller Financing: This means you can pay the seller directly over a period of time, rather than borrow money and pay at once. With a seller mortgage, you can often negotiate a better interest rate and avoid the various administrative fees charged by lending institutions. Seller financing can be attractive if you can't qualify for a loan. More importantly, it enables you to avoid mortgage insurance.
One circumstance in which such financing is available occurs when the seller has had difficulty in selling the house. If that's the case, you'll naturally want to know why. Also, sellers are not in the lending business. They tend to want a short-term mortgage -- usually not longer than three years. After that time, you will have to get a mortgage from a regular lender and pay the seller in full.
There are other reasons why a seller might want to provide financing. It gives him a steady stream of income and return without having to pay capital gains tax. The seller also has collateral -- the house. If the buyer defaults, then the seller can take the house back.
Play with the Points, Play with the Time: Depending on the mortgage, the strength of your finances and the interest rate environment, it might be to your advantage to pay off the interest or principal sooner than you might otherwise.
Pay Down the Principal: For a very long time, most of the money you will pay to your mortgage company is going to go to interest payments. That means you may be in your house for more than 20 years before you own more of it than the bank does. But there's a way to speed up the amount that you own. And why is that important (other than the obvious psychological benefits)? Because if you owe less to the bank, you will also owe them less interest.
