Reducing your EMI for the Dream home
Buying a home, particularly your “Dream” home means a big deal to lot of us. We have to have everything perfect in it with Contemporary Kitchen, marble finishes, Five piece Master baths etc. It directly translates to paying more money for better features. But just keep in mind, your first home may not have all the features your dream about. You will be able to buy your second, third or nth house better as you get more experience. But you should definitely look for some factors when buying your first home(Primary residence).
Particularly in states where real estate prices are so high, difficult to find a good home as per your needs and other factors like inflation, declaring most of the area as protected zone and having great IT zone causes the rates to go super high. So how to get the best out of what we have for a home with most of the features we need to have in it. Though it might not be possible to reduce the price of the home or the appreciation you can definitely make sure that the EMI you pay per month is less. Also stay tuned for my upcoming article on how to save wisely even on less salary.
Below is the break down of your EMI(might vary depending on state and city):
EMI(Equated Monthly installment) = Principal(20 to 30% initially for first 5 to 7 years) + Interest rate(50 to 60% – reduces later) + PMI(if you are paying less 20% down payment) + HOA dues(usually very less for single family homes) + property taxes(vary as per state and county/district you live in, if it is good school district you pay more)
Reason for writing this article is that, because we shopped better and took advice from experienced people, we pay lot less as EMI for a home that we bought out of our budget.
The pre-requisite even before you are thinking of buying a home is to have a very good credit score(pre-req for any loan) usually higher than 750 or so. If there is more than one buyer then both should have a score >750 which will ensure you get a better interest rate. It is important because for the first 5 or 6 years you pay more interest than the principal amount which means most of your EMI every month is going towards the interest. So be sure to make your payments on time, keeping your credit card usage to less than 10% and try paying just a little more than your minimum payment which will have good impact on the score. Also one big don’t is that buying a car or any big purchase just a few months(<6) before buying a Home as that will definitely reduce your credit score(due to Auto loan or any loan) and your capacity to put more down payment.
- Try to set your Search for a little older home – You can set the search to last 20 years(2000-2020) as you can the best deal on little older homes and at the same time they are more strong and sturdy as the material was much cheaper in those days and you will have a great home with antique style for a lesser price than a new one(also reusability is a step towards sustainable living. You have avoided cutting more trees for lumber, pollution caused due to building of a new home etc).
- Put a minimum of 5 – 10% of down payment: I know the prices are super high during this time in some areas due to less inventory and more demand but putting atleast 5 to 10% down will reduce the PMI(Private Mortgage Insurance) which is charged for not paying 20% down payment(more about PMI down in the article). So if you want to reduce it then go for atleast 10%(if you are capable you can pay all 20% or more but I suggest don’t lock your amount in a physical property instead invest in something else), combined with good credit score it will be much less( <200).
- Shop for a bank that gives good interest rate(hint : Federal Credit unions) : This is a very important step on reducing your EMI. Because, the interest you pay every month is really high for the first 5 to 7 years compared to the Principal so take time to research or call atleast 4 to 5 banks to get quotes, because you want to get the best deal. I suggest go with a Federal credit union banks as they don’t have many physical establishments like a traditional bank(BofA, Well Fargo etc) they provide better deals on interest rates(both savings and loans). I have personally got some good deals from First tech Federal credit union, BECU, BKCO(no affiliations) etc.
- Get a good deal on closing costs: You can talk to your agent before hand on providing a good deal on closing costs if the seller is a new builder. Usually, new builders give some deals on closing costs like underwriting, lender charge, creating docs etc.(which cost up to $10,000 additionally when you are closing) if you are going with their bank. So ask for it before hand. They usually advertise it in their pamphlets or ads. But if you are buying an old home, you should definitely talk to the banks if there are any discount deals on closing costs and sometimes if your agent is from a company which collaborates with banks you get lender costs completely off and some good discount on other closing charges( reduces to < $5000) and a good interest rate( < 2.8% -This is coming from true self experience).
- Shop for better PMI and Home Insurance: Yes, when you are shopping for banks, if you are not putting down 20% of your house cost there will be an additional premium you have to pay called “Private Mortgage Insurance(PMI)” which is a security for the lender, incase you may not be able to pay. It will be around $30 to $70 for every $100,000 you borrow or around 0.50 to 2% approx. This charge will be based on your Credit score. If you have a high score you will get a better deal on this as well as on your loan interest rate. Along with that you can also shop for better Home Insurance which comes into picture after you are done buying home. God forbid you ever have any disaster, this will help a lot and is mandatory to take it just like renter’s insurance. This adds another ($700 to $1000 or more) to your EMI. Hence, do a good research. Many companies give a good deal on bundling your home & car insurance. Ask for the deals when you are bundling.
There are some miscellaneous costs apart from the big ones I already mentioned above like HOA(Home Owners association) dues(Usually less for single family homes), water & sewer charges etc., which depend on your usage.