Saving Money On Mortgage

Saving Money On Mortgage

How Paying More on Your Mortgage Can Save You Money 

It’s the American dream to own your own home and dreamers will go to any lengths to accomplish this even if it means borrowing thousands of dollars to be paid back over a 30 year period. It’s quite an obligation to make 360 payments month after month with the bulk of the money going toward interest, at least in the beginning. 

The interest on an average home over a 30 year period can account for twice the cost of the home.  Interest is working against you 24/7/365.  Wouldn’t it be wonderful if you could pay off your debt years sooner and save thousands of dollars? 

You can.  It just takes discipline and perhaps a little budget adjusting. It’s no secret that paying the mortgage twice a month, instead of only once will save you thousands and pay off your debt years sooner.  Some call it the bi-weekly mortgage plan.

For example:  Let’s say you paid $80,000 for your home and got a 7% loan for 30 years.

If you divide the payment in half and pay it every two weeks you should save $25,000 in interest payments and reduce the term by 8 years. 

Not bad for a little extra work.  Of course, the higher the loan and interest, the more you save.  You’re paying less interest and more on the principal.  The extra payments bring down the principal and interest faster.

Can just setting up a shorter mortgage term in the beginning accomplish the same thing?  Essentially yes. But many people cannot qualify for a shorter term mortgage because of the higher payment.  With the bi-weekly plan, you can take control yourself and enjoy the flexibility. 

There are many companies who will set this up for you for a fee ranging from $100 to $400.  Or, some will do it free but charge a transaction fee each time you make a payment. 

Can you do it yourself?  Yes, but talk to your lender and read the fine print in your contract.  You may have a pre-payment penalty for paying off the loan ahead of time.

Some lenders also tack on a service fee each time you make the extra payment.

Banks can also provide you with a bi-weekly calculator to let you determine how much you would save and how soon you would actually own your home.  You’ll also save on private mortgage insurance (PMI) by paying off the loan early.

By paying bi-weekly, you’re actually paying one extra payment a year and that makes the difference.  You can accomplish the same thing by making an extra payment whenever you can of any amount.  When you do this, write a separate check with a note that states the money should be applied to the principal and not the interest.

Most financial institutions are happy to help you with saving money on your mortgage but it’s up to you to get the financial ball rolling.  For about the cost of dinner and a movie for you and your family each month you can be debt free years sooner and save thousands of dollars.

Is Refinancing Going to Help Save on Your Mortgage? 

Are you bogged down in debt?  Are your monthly home mortgage payments rising each year and getting harder and harder to pay?  If this situation sounds familiar, you may have considered refinancing your mortgage.  But, will it help?

When you refinance you’re simply taking out a new loan to pay off the existing one.  It only makes sense to do this if you obtain a lower interest rate enabling you to save money. 

Usually, there are two good times to refinance.  If you have an adjustable rate mortgage (ARM) and you’re faced with a continual interest rate rise.  You can refinance to obtain a fixed rate mortgage and avoid the higher payments.

Even if you already have a fixed rate mortgage, it might pay you to refinance if you can secure a lower interest rate.  If you’re experiencing a cash flow problem and want to refinance to lower the payments by extending the term of your loan this is not a good reason.  With an extended term you’ll be paying more over the years remaining that you own the home.

Calculate the cost of refinancing.  It won’t come free you know.  There are various fees such as points, application and recording fees, title search and PMI fees.  Other closing costs you may have to pay are survey and appraisal charges. 

You usually have to pay for private mortgage insurance (PMI) if the loan to value ratio is greater than 80% of the appraised value.  It’s to your advantage to pay the loan down as soon as possible to avoid PMI.

A cash-out financing arrangement may be suitable if you’re disciplined on how you spend your extra money.  A cash-out deal is when you refinance and borrow more than you owe.  Pay off the existing mortgage and any excess money is yours to use however you wish such as paying off credit card debt.

If you make the decision to refinance, make sure you save enough to recover the cost. It could be just a break-even proposition.  Usually, a good rule of thumb is not to refinance if you plan to move within five years.  It probably will take at least that long to recoup the expenditures.  Calculate this to be sure.

Use a refinancing loan calculator to determine if a new loan is feasible.  Your lender will be happy to let you use theirs or you can access one on the Internet.  They’re easy to use, just plug in the pertinent loan information

Remember that your refinanced mortgage will be secured by a lien on your home.  If for some reason you’re unable to make payments the lender can foreclose and possibly sell your home to pay off the mortgage.

The decision to refinance should not be taken lightly.  Examine each avenue thoroughly.  Educate yourself on each step.  Ask for advice.  If the move is right, it could lift you out of debt and help make you a happy homeowner.

Make Mortgage Lenders Compete For Your Money 

Selecting a mortgage for your home could be the most important financial decision you will make.  It’s an obligation you assume for many years and a small difference in any part of the negotiations can make a big difference in your monthly payments.

Mortgage lenders want your business so don’t be afraid to negotiate.  Do your homework and let them know you’re shopping around for the best deal.  The more you know, the better position you’re in to bargain. 

It’s your money and worth the effort.  Rarely are rates and terms engraved in stone in the negotiating stage.  Even a quarter point better interest rate obtained can save you hundreds or even thousands of dollars in the long term.

Start by obtaining your credit reports and check them thoroughly for errors.  There are three basic credit report companies and you should check them all.  It’s estimated that at least 50% of credit reports contain errors.  If you can’t get them corrected you could pay more for your loan or even worse be denied.

Educate yourself on the difference types of loans.  There are basically two types:  conventional and government.  Any mortgage other than FHA, VA or RHS (Rural Housing Service) is conventional.  Decide which is best for your needs.

Mortgage rates fluctuate.  Keep track of these rates by watching the Treasury Market and the overall market trends.  Determine what kind of rates various lenders are offering and compare.  But, look at the whole picture including fees and points.  Lenders can waive certain fees but be careful they don’t waive one and tack on another.

Before you come before a lender ask yourself some questions and be honest with the answers. Ask how long you plan to stay in the home, what’s the largest monthly payment you can afford, how much is the down payment and will your income remain stable or do you expect it to be cut or increase in the near term.  Also ask if the loan is assumable.  This could be very important if you plan a move early on. 

If you don’t want to search for a lender yourself a broker can do this for you for a fee.

Remember, he’s not obligated to find you the best deal, just a lender.  Once you have a lender you’ll negotiate terms yourself.  Be sure and ask how the broker will be compensated so you don’t get stuck with an unexpected expense.

When you’re satisfied and think you’ve negotiated the best possible deal, have the lender write down all costs and get a written lock-in.  This will protect you from any interest rate increases while your loan is being processed which can be lengthy.  If interest rates fall during the process this could work against you but most lenders will work with you if this happens.

This may sound like a lot of work, and it’s not unlike buying a car, but if saving money is your goal it’s worth the effort.  The better credit risk you are and the more they think you know the more willing lenders are to compete for your business.  When they compete you win. 

Plug in Points to See How Your Financing Will Pay Off 

One of the most innovative financial markets is the home mortgage loan sector.  And, when you toss points into the mix it adds convolution to an already complicated process.  Most buyers don’t understand the concept of points and hesitate to ask or go to the trouble to learn about the process.  They become overwhelmed and can be at the mercy of whatever the lender offers.

It’s actually quite simple.  Points are fees paid to a lender for a loan.  The points are usually linked to interest rates with the more points you pay for, the lower the interest rate.  You can view them as pre-paid fees.  It’s sort of pay now with points or pay later with interest. 

If you have the cash on hand to pay points and you still can’t decide if you should pay them to get a lower interest rate ask yourself what you would do with the money if not spent on points.  If you’re buying a home you probably have many needs for the extra money but don’t be short-sighted.  Invest for the long term.

Most lenders typically charge one point for the loan origination fee and additional points on loans that have interest rates under the current market rate.  The lender gets some money up front in exchange for a lower interest rate.  It’s a win situation for both parties. You can check the newspaper or the Internet for current rates and points being offered and their combinations, which are many and negotiable.

Some points will reduce the interest rate and some won’t. Discount points are based on how much money you borrow.  One point equals 1% of the loan.  For example, 1% of $100,000 would be $1,000.  You can expect a reduction of about one quarter percent for each point paid.  Paying points does not reduce the amount borrowed but how much you’ll be paying back.  So, paying points depends on a lot of factors.

If you don’t have the cash to pay points then it’s a moot point.  (No pun intended).  The main thing to consider is how long you plan to keep your home.  In other words, will you keep the home past the break-even point?  That’s when your accumulated monthly savings exceed what you’ve paid in points to get the interest rate down.

Paying points is probably a good investment if you plan to keep the home five years or more. Points can be considered an investment when it continuously yields a savings the longer you stay in the home.

A chart can be prepared to show you the options and when the break-even point occurs.  Ask the lender to quote points in dollar amounts so you can easily see how much you’re spending. 

It’s thought the point system is used only in the United States.  That’s probably a plus for the creators of our financial system which enables more families to purchase a home who otherwise would not qualify.  Get the point?

Two Ways to Save When You Buy a Home 

Buying a home is probably the largest investment you and your family will ever make.

Unless you’re wealthy, few people buy homes and pay cash.  Rather, they make a small down payment and obligate themselves to a financial lender for a term of usually 30 years.  In this case, the lender determines the interest rate and gives you a thorough financial background check.

There are at least two other ways to buy the home of your dreams and probably save money:  assuming the existing mortgage or owner financing.  Either method usually saves you time, trouble and money. 

If you’re trying to assume a mortgage first make sure it’s assumable and transferable.  Many mortgages have a due on sale clause that states if the owner sells all or part of a house the entire balance becomes due and payable on demand.  A lender may be willing to overlook a non assumable mortgage is you’re able to make good any overdue payments and agree to do further business with the existing lender.

If a house is selling for $100,000 and the owner still owes $60,000, you could pay the owner the equity of $40,000 and assume the debt of $60,000 with the existing lender.

This is good for the buyer if the existing interest rate is equal or lower than the current rates for a home loan.  A second mortgage may be needed for the equity payment.

There are different ways to assume a loan.  You can, as a buyer, assume the legal obligation for payments and usually pay an assumption fee of 1% of the loan balance.

Or, you could take over the payments leaving the seller still legally obligated for payment if you default.  If this happens, you lose the property and the seller’s credit is harmed unless he makes payments as scheduled.

Seller (owner) financing is good if a buyer can’t qualify for a traditional loan and if the owner has had trouble selling and is in a hurry to unload the house.  In this case, it would be wise to find out the need for the rush selling or why the home has not sold previously.

For the agreed upon price you would begin making monthly payments to the seller usually at a lower interest rate than is being offered at institutions.  There is little risk as the home is collateral.  If you default, the seller regains possession of the house.

The seller may also need to have an additional stream of income each month instead of getting it in one lump sum.  And, he could save on some of the capital gains tax.  With owner financing, you as a buyer can avoid some (not all) costly administrative fees and private mortgage insurance (PMI).

Assuming an existing mortgage or obtaining owner financing are two great ways to become a homeowner and save money at the same time.  No matter what the current status of the real estate market is or if interest rates are high or low, there are always creative ways to obtain financing.