Home Equity Purchases Can Save Home Buyers $1,200 a Year
You could be missing out on an easy way to save on your monthly mortgage payments — and make your next home purchase more affordable.
It turns out that many buyers skip an important step when applying for a home loan: shopping around. Research has shown that borrowers who apply for home loans from at least four lenders are more economical $1,200 or more per year. However, according to a Zillow report published last week, 7 out of 10 prospective homeowners are not buying to get a better price, choosing to apply for a mortgage with a single lender.
Whether it’s because the loan application process seems complicated, borrowers are confident in the first offer they receive or they believe that all lenders offer the same rates, the decision to apply to only one lender “can be a missed opportunity that costs consumers tens of thousands of dollars over the life of the loan,” as Zillow senior economist Kara Ng wrote in the report.
For example, a 30-year, $360,000 loan at Freddie Mac’s current rate of 6.24% would have a monthly payment of about $2,345. The payment on the same loan with a lower half-point rate would be about $100 lower, representing an annual savings of about $1,100.
Those savings can be multiplied in markets where home prices are more expensive, such as Seattle or San Jose, California.
At the same time, a lower rate allows the borrower to qualify for a larger loan amount, which increases the number of homes a buyer can afford and, therefore, the number of purchasing options. Depending on the market, getting an interest rate reduction of half a point could result in hundreds of homes falling within a buyer’s budget.
Besides shopping for the best interest rates, buyers will have a better chance of finding their dream home in the new year. Market conditions are changing in favor of consumers.
Mortgage rates have been at record lows since mid-July. These low rates have already improved affordability for some marginal buyers. This trend is likely to continue into next year, as mortgage experts predict that mortgage rates will remain in the current low range of 6%.
“This small improvement in affordability is actually opening up the need for foreclosure, especially in households that have not reached it. [buy] in 2025,” said Ng.
Another factor that will help improve buying conditions is slowing house price growth, which Ng said he expects to increase by around 1% next year. Those price gains are expected to be offset by wage growth, which is forecast to increase by 3.5%.
More disposable income, combined with lower monthly payments, is expected to make home buying more accessible to a wider segment of buyers.
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