Buying a House? These 5 Strategies Saved Us $18,000
Are you in the market for a new home?
You’re not alone — 35% of homebuyers are buying for the first time. That’s up last year from 32% — and that’s a lot of people who are completely new to the process!
Even if you’re not a newbie, the market may have changed since the last time you thought about buying a house. And you’ll need to make key decisions along the way, so it’s important to do your research and seek advice.
With a little effort, you can save money on closing costs, homeowners insurance and other big ticket items.
Here’s exactly how we were able to save an extra $18,000 as first-time homebuyers — and how you can, too!
How We Saved $18,000 Buying a House
My husband and I recently joined the first-time homeowners club.
But we didn’t get the first house we made an offer on. Or the second. For us, the sixth time was the charm.
That’s because we faced some tough competition. Every time we made an offer, other people made offers — including all-cash ones — and we kept getting outbid. We didn’t want to mistakenly overpay, so we remained patient and kept looking.
The first time we made an offer, it was an emotional experience. We pored over every word of the contract, carefully evaluating how each negotiating point would make us more or less attractive to the sellers. But after a while, we became more comfortable with the process.
Finally, after four months of searching, our sixth offer was accepted!
Perhaps you’ve had a similar experience.
Many cities currently have a seller’s market — with more homebuyers than homes to buy. This leads to multiple offers and bidding wars among buyers.
Despite the intense competition, we found five ways to save a total of $18,000. Here’s are a few tips that any first-time homebuyers can use:
1. We Used Our Bank for the Mortgage
We saved $1,000 on closing costs by getting our mortgage through our bank.
How much are closing costs? It varies by state, but on average, expect to pay between 2%-5% of your home’s purchase price.
In April 2016, the median price of a home was $232,500 (not including newly constructed homes). At this price, your closing costs would be somewhere between $4,650 and $11,625.
Keep in mind newly constructed homes tend to cost even more. In fact, the median sales price of a new home was $321,100 in April 2016. Therefore, expect your closing costs to be higher with a new home than an older one.
The good news is you can save some money on these pesky fees. Here’s what we did.
We had three accounts with one bank: a checking, savings and business account. So our bank was the first place we went to get a mortgage quote.
Because of our existing accounts, the bank offered us a “relationship credit” of $1,000 to offset our closing costs. At the time, we didn’t know about relationship credits and were lucky our bank offered them to us.
However, we had to meet one requirement before we could receive the credit: After making our down payment for the house, the remaining combined funds in our checking and savings accounts had to be above a certain dollar amount.
Our bank essentially rewarded us for keeping our assets there. The more assets we kept with the bank, the higher the relationship credit would be.
What You Can Do
Find out if your bank offers a relationship credit in exchange for maintaining a certain account balance. For example, here are some of Citibank’s relationship credit options and requirements.
If not, find out if other banks do and consider moving some or all of your money there to get the credits.
Shop around — a little effort can mean big savings.
2. We Got Mortgage Quotes From Multiple Lenders
We ultimately chose our bank for our mortgage, but we shopped around first. You should always get a mortgage quote from at least two lenders.
There are two reasons to get multiple quotes.
First, it allows you to comparison shop. Buying a home is a big financial commitment, so if you don’t normally shop around for a deal, this is the one time you should!
What are you shopping around for, exactly? Most people want to get the lowest possible interest rate and closing costs.
The second reason is so lenders can compete for your business. Essentially, you can start a mini bidding war.
How would you actually do this in practice? Let’s say you really want to work with a specific lender. Perhaps you’re partial to it because it has a branch in your neighborhood, or maybe you’ve had an account there for years.
But when you compare its mortgage terms with another lender’s, they’re not competitive.
You can go to the lender you like and say, “I really want to work with you. However, this other bank is offering me a lower interest rate of X and lower closing costs of Y. Can you do better?”
That’s exactly what we did. We were transparent with both lenders we reached out to. We provided them each other’s mortgage terms, and asked for the lowest interest rates and closing costs they could offer.
Our bank came through, offering us a $1,200 lender credit to offset closing costs, in addition to the $1,000 relationship credit it had already offered us.
What You Can Do
Do some online research. Sites like Nerdwallet let you quickly compare rates across multiple lenders.
Contact at least two lenders and get a mortgage quote from each, including your own bank. Then negotiate to get the best terms.
3. We Used the Bank’s Appraisal to Negotiate
We used the bank’s appraisal to negotiate the home’s price down by $10,000.
Your lender will hire an independent professional appraiser to assess your new home’s value before you finalize the purchase. Your lender needs to make sure the home is worth as much as you’re paying for it, since it’s lending you money. This protects you both.
The appraiser uses various data points to figure out what your home is worth, like its age and condition, as well as the price of comparable homes recently sold in the same area. Then the appraiser writes a report and provides it to you and the bank.
If the appraisal comes in lower than your offer, the bank won’t give you the full mortgage amount that you requested, and you’ll have to pay the difference out of your own pocket.
Let’s do the math. Let’s say you offered $100,000 to the sellers with 20% down, so the bank was initially going to lend you the remaining $80,000.
However, the appraisal says the home is actually only worth $90,000. The bank will still give you a loan for 80% of the value — but now instead of $80,000, it’ll only lend you $72,000 based on the appraised value.
So, you’ll have to put $28,000 down instead of $20,000 — an extra $8,000 out of your pocket you weren’t planning on.
How often does this happen?
It’s common for buyers to compete aggressively against each other in today’s hot market, resulting in a multiple-offer situation. In these cases, the winning bid is often above the seller’s asking price.
When things heat up like this, there’s a good chance the appraisal will come in below the winning offer.
In our case, the appraisal came in $10,000 lower than our offer. So we decided to negotiate with the sellers and ask them to lower the price to match the appraisal.
Luckily, this strategy worked for us — the sellers agreed to lower the purchase price by $10,000.
What You Can Do
Try not to pay above the appraised value. Ask your realtor to negotiate with the seller’s realtor to get the price down all the way — or at least partially. It never hurts to try!
If that doesn’t work, you can either increase your down payment or use your appraisal contingency to terminate the deal.
4. We Got Discounted Homeowners Insurance by Buying Auto Insurance
We got a $350 discount on our homeowners insurance policy by agreeing to buy auto insurance from the same company.
On average, homeowners insurance costs $952 a year. However, prices vary a lot depending on where you live — Florida homeowners typically pay the most, while Idaho residents pay the least.
Many insurance companies offer a discount if you buy multiple policies — homeowners, auto, life — from them.
When we bought our home, we lived in New York City and didn’t have a car. But we were planning to buy a car eight months later, once we moved into our new house.
Our insurer told us we could still get a discount even if we didn’t immediately need the auto insurance. In fact, we could get the discount now for the next year as long as we agreed to buy the auto policy from them before the 12 months were up.
If we didn’t, the homeowners insurance policy would go back up to the normal price for the following year. Since we knew we’d buy a car in the not-so-distant future, we agreed and immediately got a $350 discount.
Tips for How to Save as a First-Time Homebuyer
Shop around for the best homeowners insurance policy and understand the factors that influence price.
Pay attention to the insurance company’s rating from A.M. Best (the rating agency for the insurance industry), as well as customer reviews.
Narrow the list down to two or three companies and contact each for a quote. Ask specifically about discounts for buying multiple policies.
5. We Temporarily Rented Out Our New House
Let’s say you’re stuck paying two mortgages because it’s taking longer than you expected to sell your old house.
Perhaps you can’t terminate your apartment lease and you get stuck with your new home’s mortgage payment in addition to your rent payment.
For various reasons, we weren’t planning to move to our new house for eight months, but we weren’t about to pay both our rent and our mortgage. So we rented it out.
We temporarily rented out our new house. After using the rental income to pay the home’s mortgage and expenses, we had $680 left over every month, which we used to pay for our NYC apartment. This resulted in a total of $5,440 in savings on our rent.
But this may not always be an option.
Your new home may be part of a co-op or homeowners association that doesn’t allow renters. Perhaps it needs major renovations and is unfit for tenants. Luckily, our home didn’t require tenant approval from anyone (except us!) and was move-in ready.
What You Can Do
Think creatively about how to make the most of your situation.
If you can earn rental income on your property in order to subsidize your lifestyle, consider it a win!
Your Turn: Have you used any tips or tricks to save money while purchasing a home?
Lana Axelrod is the founder of SageCouple, which provides practical financial advice and money boot camps for engaged and newlywed couples. Lana has an MBA from Harvard Business School and a B.S. in Finance and Accounting from NYU’s Stern School of Business.