No. 1: Make a bigger down paymentA larger down payment can ease the pain of housing payments, says Jim McQuaig, branch manager of Churchill Mortgage in Herndon, Va. "Not only are you financing a lower balance, but if you make a down payment of 20 percent, you eliminate private mortgage insurance (PMI)." For example, a 30-year, $250,000 loan at 4.5 percent with a 20 percent down payment ($50,000) has a monthly payment of $1,353, says McQuaig. That same purchase with a down payment of 5 percent ($12,500) will cost $1,666 per month, including PMI.
No. 2: Pay points"You can lower your mortgage rate and your payments by paying one or two discount points," says Clint Madison, senior mortgage banker with Envoy Mortgage in Walnut Creek, Calif. One discount point brings down your rate by about 0.25 percent, he says. For example, on a $350,000 purchase with a down payment of 5 percent ($17,500), paying one point ($3,325) would lower the rate from 4.875 to 4.625 percent and reduce the monthly payment from $1,760 to $1,710, says Madison. Applying the extra $3,325 to the down payment instead would generate a payment of $1,741.
No. 3: Equity sharingEquity-share arrangements can be made with parents, investors or friends, says McQuaig. "You can negotiate an equity share deal in which the parents put in the cash for the down payment that's repaid when the home sells along with a share in the profit," he says. "For instance, if the investors make a 20 percent down payment on a $200,000 home, they'll get $40,000 back along with 20 percent of the equity in the home."
No. 4: Switch loan productsMany buyers opt for an FHA mortgage because of the 3.5 percent down payment requirement, but FHA mortgage insurance is higher than PMI, says Madison. If you come up with another 1.5 percent for a 5 percent down conventional loan, your monthly payments will be much lower, he says. "A $350,000 purchase with an FHA loan at an interest rate of 4.125 percent will cost $2,482 per month including principal, interest, taxes, insurance and mortgage insurance," says Madison. "With a 5 percent down payment and a conventional loan interest rate of 4.875 percent, the monthly payment will be $2,357."
No. 5: Shorter termsInterest rates on 15-year mortgages are lower than 30-year mortgages, but few first-time buyers can afford the higher payments, says McQuaig. "A better choice, particularly for buyers who don't intend to stay in their home for long, would be a 5/1, 7/1 or 10/1 ARM, which have a lower interest rate than a fixed-rate loan," says McQuaig.
For example, the payment on a $250,000, 30-year loan at 4.5 percent (5 percent down) would be $1,666 and $1,529 on a 5/1ARM at 3.5 percent, he says.