Getting a new mortgage can feel daunting, whether you’re refinancing an existing loan or buying a new house, due to the upfront cost and recurring payment obligations.
But smart financial strategies like bi-weekly payments, closing cost credits, and temporary buydowns can significantly reduce your cash outflow and improve affordability.
The strategies we’ll discuss can help to lower your initial expenses or recurring payments, giving you more flexibility with your budget.
And, let’s face it, we all enjoy saving money!
Understanding how each of these strategies work is a critical first step to maximizing your savings.
Bi-Weekly Mortgage Payments
Short Term Advantages:
Bi-weekly payments help by effectively reducing the average daily balance on your loan.
By paying every two weeks instead of once a month, part of your payment goes toward the principal sooner, which means you’ll be charged interest on a slightly lower balance for the remaining days in the month.
While this effect is small month-to-month, it adds up over time.
Even though the bi-weekly payments only slightly impact each month’s interest, consistently lowering your balance reduces the amount of interest accrued.
Example:
Loan amount: $500,000
Interest rate: 6%
Term: 30 years
Monthly payment: $2,997.75
Bi-weekly payment: $1,498.88 (half of monthly)
By switching to bi-weekly payments, you make 26 half-payments in a year (instead of 12 full payments).
Over a year, this results in an extra full payment of $2,997.75.
- With regular payments, your balance after 12 months would be approximately $494,624.
- With bi-weekly payments, your balance after 12 months would drop to $493,907.
This difference is modest in the first year but continues to grow as you pay down the loan.
Long Term Advantages:
The biggest long-term benefit is the extra payment you make each year.
Instead of making 12 monthly payments, you make 26 half-payments, which equals 13 full payments per year.
This extra payment goes directly toward reducing your principal, which decreases the total interest you pay over the life of the loan and shortens your loan term.
By consistently reducing your balance faster, you’ll pay less overall interest and the loan will be paid off sooner than the initial maturity date.
Example (over the life of the loan):
Loan amount: $500,000
Interest rate: 6%
Term: 30 years
Monthly payment: $2,997.75
With regular monthly payments:
Total payments: $1,079,190
Total interest paid: $579,190
Loan paid off in 30 years.
With bi-weekly payments:
Total payments: $935,651
Total interest paid: $435,651
Loan paid off in about 25 years (5 years early!)
- Total interest saved: $143,539
- Time saved: 5 years
This long-term savings can be substantial, making bi-weekly payments a smart choice for reducing the total interest paid, and paying off your loan faster.
Temporary Buydowns
A temporary buydown is when a borrower’s interest rate is reduced for the first few years of a mortgage, usually 1-3 years, with the rate stepping up annually until it reaches the full rate.
Common buydowns are 2-1 or 3-2-1, where the rate is reduced by 2% in year 1 (for 2-1 buydown), 1% in year 2, and then reaches the full rate in year 3.
How Do Temporary Buydowns Save Money?
You pay lower interest in the first few years, reducing your monthly payments during that time. This can make the loan more affordable initially, especially when rates are high.
Example:
If your full interest rate is 6% on a $500,000 loan:
Year 1: You pay 4%, reducing your payment to $2,387/month (saving $610/month).
Year 2: You pay 5%, with a payment of $2,684/month (saving $313/month).
Year 3 onward: You pay the full 6%, with a payment of $2,997/month.
Total savings over the first 2 years would be $11,076.
This is effective for borrowers who expect income to increase – or plan to refinance before the full rate kicks in. It can also help qualify for a larger loan by reducing payments early on.
Are There Any Drawbacks?
Higher full-term rate:
The loan’s full rate doesn’t change; after the buydown period, you’ll still be paying the full interest rate, so the long-term cost remains the same.
Upfront cost:
The buydown is typically funded by the seller or builder, but sometimes the borrower covers the cost, which can reduce the overall savings.
Temporary savings:
Once the buydown period ends, your payments jump to the full amount, which could be a financial strain if your income hasn’t increased as expected.
In summary, temporary buydowns are effective for temporary relief and making home buying more affordable in the earliest years.
Seller Closing Cost Credits ($)
Seller credits are quite common in real estate transactions, especially in buyer-friendly markets where sellers may need to offer incentives to attract buyers.
However, they’re less common in hot markets with high competition among buyers.
What is a Seller Credit?
Simply put, seller closing cost credits reduce the amount of money you need to bring to closing.
For example, if closing costs are $10,000 and the seller offers a $5,000 credit, you only need to pay the remaining $5,000.
By covering part of the buyer’s expenses, seller credits can help buyers keep more of their savings, which they can use for other purposes like moving expenses, home improvements, or emergencies.
How to Get a Seller Credit?
Negotiation:
You can ask for seller credits during price negotiations, especially if the home has been on the market for a while or if there are repairs needed.
Include in offer:
When making an offer on a home, you can request a specific credit amount as part of your offer terms. It’s more likely to be accepted if the seller is motivated to close the deal.
Do Seller Credits Have Any Rules and Limitations?
Different types of loans:
Certain loave specific caps on how much the seller can contribute. Typically:
Conventional loans: 3% to 9% of the purchase price, FHA loans: Up to 6%, VA loans: Up to 4%
Cannot exceed closing costs:
The credit can only be used for actual closing costs and cannot exceed the total amount of these costs. Any leftover credit goes unused.
Appraisal limitations:
The home must appraise for the full sales price, including the credit amount. If the appraisal comes in lower, the deal could fall through or need to be renegotiated.
Seller credits can save you money by reducing upfront costs, as long as you’re able to agree on the terms. Strong negotiating tactics come in handy here and increase your chances of success.
Lender Closing Cost Credits ($)
A lender credit is when the lender offers to cover part of your closing costs in exchange for a slightly higher interest rate on your mortgage.
Instead of paying more upfront, you pay a little more each month over the life of the loan due to the increased rate.
How Do Lender Credits Work?
When you accept a lender credit, your interest rate goes up, but the lender pays part of your closing costs.
It’s essentially trading upfront savings for higher long-term costs.
Example:
On a $500,000 loan with a 6% interest rate, you might have $5,000 in closing costs.
You could choose a 6.25% rate with a lender credit of $3,000, reducing your out-of-pocket costs to $2k, but slightly increasing your monthly payment.
How Do Lender Credits Save Money?
Lower upfront costs:
If you’re short on cash for closing costs, lender credits help reduce or eliminate those costs, making it easier to get into a home with less cash.
Preserve savings:
It can help you keep more money in savings for emergencies or home improvements after you close.
Flexibility:
You can use the credit toward most closing costs, including origination fees, appraisal fees, and title insurance.
How to Get a Lender Credit?
Ask your lender:
When discussing loan options, ask about lender credits and how much you’d receive for accepting a higher rate.
Compare offers:
Different lenders offer different credit amounts for different rate increases, so shop around to find the best deal.
Do Lender Credits Have Rules and Limitations?
Tied to higher rates:
The higher the lender credit, the more your interest rate will increase. There’s a trade-off between upfront savings and long-term costs.
Cannot exceed closing costs:
Lender credits can only cover actual closing costs. Any excess credit is lost and cannot be applied to the loan balance or down payment.
Long-term cost:
The higher rate means you’ll pay more interest over time, which could outweigh the initial savings from the credit.
How To Assess Lender Credit Options?
Calculate break-even:
Determine how long you’ll stay in the home. If the monthly payment increase from a higher rate costs more over time than the closing costs you’re saving upfront, the credit might not be worth it.
Example: If a lender credit saves you $3,000 upfront but increases your payment by $50/month, it will take 5 years (3,000 ÷ 50) before the higher rate starts costing more than the credit saved you.
If you plan to sell or refinance before that time, it may be a good option.
Consider long-term financial goals:
If you plan to stay in the home for many years, paying upfront closing costs and locking in a lower rate might save more in the long run compared to a lender credit.
Lender credits are common, especially for buyers with limited cash.
Assess your options by comparing upfront savings versus long-term costs, as well as considering how long you’ll stay in the home.
Final Thoughts
As you navigate the homebuying process, consider how these tools and strategies can benefit you directly, both in the short-term and the long-term.
Whether your goal is to minimize upfront costs, or reduce your initial monthly payments, these options offer flexible solutions tailored to your needs.
However, it remains crucial to assess any trade-offs before making a final decision.
Are you ready to explore these options?
Speak with a divorce mortgage advisor to determine the best strategy for your unique situation.
We would love to answer your questions and guide you through next steps.
Happy savings!
Sincerely,
Ross Garcia | Founder
Divorce Mortgage Advisors