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How to Save Money When You Transition From Renting to Homeownership

While a home can be costly, ownership doesn’t have to be terrifyingly expensive.

Making the leap from renter to homeowner is the fabled American dream, a huge milestone right up there with graduating from school and getting married. Having a place you can proudly say you own comes with many perks, but also plenty of costs.

There are the upfront expenses, including the closing costs: the fees and taxes that must be paid on closing day, when the sale is completed. Then, you face all of the ongoing costs, like interest, insurance, maintenance, and more taxes.

When you tally everything up, it turns out that owning a home often costs more than renting — an average $607 more per month across America’s 50 largest metro areas, according to LendingTree.

But don’t let that discourage you, says LendingTree chief economist Tendayi Kapfidze. 

“Although buying a home can be expensive, it can also be a good investment in the long run. The longer you stay in your home, the more equity you’re likely to build over time as you pay down your mortgage and home values appreciate,” Kapfidze says.

Buying doesn’t have to be incredibly expensive. Many of the costs are negotiable or can be reduced if you shop around to find your cheapest options. Here are some tips on how to squeeze out savings on some of your biggest expenses as you go from renting to owning.

Pay as little interest as possible

The interest on a mortgage will cost a homeowner tens of thousands of dollars over time, if not hundreds of thousands.

But if you’re making the switch from renter to owner in 2020, your timing is excellent. Mortgage rates have never been lower, so you might score a loan that was once unthinkable — a 30-year fixed-rate mortgage with a rate under 3% — and enjoy serious long-term savings.

According to an analysis, a mortgage taken out this year for a typical home costs $175 a month less than a loan at last year’s rates.

“For first-time homebuyers, many find they can afford a starter home for payments similar or less than what they are currently paying for rent,” says Glenn Brunker, mortgage executive with online lender Ally Home.

To land the lowest interest rate possible:

  • Pay down debt and take other steps, so your credit score is very good (740 to 799) or exceptional (800 to 850).
  • Consider going with an adjustable-rate mortgage, instead of a fixed-rate loan. Variable-rate mortgages are usually offered at lower rates, though they can “adjust” higher after a certain number of years.
  • Compare loan offers from at least three lenders. Never accept the first one you see, because different lenders can offer widely different mortgage rates.
  • Commit to making a large down payment, to show a lender you’re willing to be heavily invested in the home and are a good risk worthy of a low-interest rate. 

Get help with your down payment

Homebuyers have traditionally been advised to make cash down payments of at least 20% of a home’s value. That can help you get approved for your loan, slash your interest rate and avoid paying private mortgage insurance, or PMI. 

The insurance protects the lender if you stop paying on your loan; when you put less than 20% down, PMI premiums are tacked on your mortgage payments until you reach at least 20% ownership or equity in your home.

Making a 20% down payment can be daunting, so many borrowers are apparently willing to accept PMI. The average first-time homebuyer puts just 6% down, the National Association of Realtors found. 

On a $150,000 home, a 6% down payment would amount to $9,000 — which might still be a stretch for some buyers.

But don’t let a down payment keep you from realizing your homeownership dream. Local and federal government grants for first-time homebuyers can help you come up with the cash, and some loan programs allow you to pay as little as 3% down.

Cut your upfront and closing costs

Charges you’ll encounter during the homebuying process include inspection and appraisal fees. Each typically runs between $300 and $500, says real estate brokerage Redfin; you might find rates on the low end by asking family and friends if they can recommend an inspector or appraiser. 

You’ll want a home inspected so you’ll know whether it has any potentially expensive problems lurking.

Lenders generally require appraisals to make sure you’re not overpaying for your house. That way, they can feel confident they won’t lose money if you default and the house has to be sold.

Closing costs — due when you sign all the paperwork on closing day — average a stiff $5,749 nationwide. 

Reduce your closing costs by:

  • Seeing if your lender will give you a break on its fees, including its processing charge, or origination fee.
  • Reviewing the loan estimate you got from your lender to find the section on “services you can shop for.” For example, you’ll learn that the standard homebuyer pest inspection is something you can shop around to find a low fee.
  • Asking the seller to help pay your closing costs. This works only in a buyer’s market when sellers are more than happy to do whatever it takes to close a sale. But you’re not likely to win this concession in today’s seller’s market, with homes for sale in short supply.

Reduce your insurance costs

Chances are your lender will require you to carry homeowners insurance on your new property, but it’s something you’ll want to have anyway. Otherwise, how would you rebuild your home and replace your stuff after a fire or a tornado?

The U.S. average annual cost of home insurance is $1,211, says the National Association of Insurance Commissioners.

To lower home insurance premiums:

  • Raise your deductible, the amount you’ll pay out of pocket for any damage before your insurance begins picking up the tab.
  • Purchase your home and auto insurance from the same insurer. Often there’s a “bundling” discount.
  • Gather quotes from multiple insurers to find the best deal.

That same type of comparison shopping can find a reasonable price on other important insurance for any homeowner: life insurance

If something happens to a family breadwinner, life insurance can pay off the mortgage and spare loved ones from financial stress. A policy can cost a healthy 30-year-old as little as $13.30 a month for $250,000 worth of coverage — a small price to pay for peace of mind. 

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