HOW TO SAVE THOUSANDS IN FINANCE CHARGES:
It is important to understand how much the true cost of your home really is and how you can change it. People will spend months thinking and looking for the right home; however, when it comes to paying for it most people don't give it much thought. We will show you very quickly a few ways to save drastically on the total cost of owning your home, but, please call us for more details on your specific situation. We just want to point out there are many ways in which you can save huge dollars on the cost of owning your home.
First let's look at how your mortgage is really calculated. Let's assume your mortgage balance is $100,000 and that your principle and interest payment is $1,000 per month just for simplicity sake. At the end of the month when your payment is due your mortgage has gained interest of $998.50 and your payment of $1,000 dollars pays $998.50 in interest and $1.50 goes toward your principal. The following month we have a principal balance of $99,998.50 that will be accruing interest.
The problem with this picture is far too little of your payment is going toward principal and as a result we end up paying 2.5 - 3.5 times the purchase price. On a $200,000 loan at ten percent you will end up paying $626,630 over the life of the loan, that's over three time the original amount.
Now let's look at some ways to battle this problem. Using the above mentioned example lets take the same $200,000 loan, at ten percent interest, making your principal and interest payment 1,740/month. Let's add fifty dollars as an extra principal payment and see what happens. Just fifty dollars a month drops your total payments from $626,630 to $553,307, that's a savings of $73,322 and that includes the cost of the extra fifty dollar payments. In other words, if you can afford an extra fifty dollars a month, which I think almost everyone can, you will save in real dollars over $73,000. Not only that, but, you will also cut off 4 and quarter years off the life of your loan. Your loan will now pay off in 25.75 years rather than 30. This is just one small example of how small extra principal payments can save huge dollars.
Here is another method you can use to accomplish similar results; however, conserve more cash flow. This method is where you make two principal payments with each payment. To do this you will need to get an amortization schedule for your specific loan that breaks down the principal and interest payments scheduled. When you make your first payment you also pay for the second principal payment. With each payment you make the principal payment for the next payment. This method will allow you to literally pay off your loan in half the time and the extra principal payments will increase as the percentage of the principal amount of your mortgage payment increases. This strategy is great for anyone who is tight on extra funds and in the future will have an increased income or lower debt load.
We have saved the best for last; the bi-weekly mortgage payment system. This is where you split your mortgage payment in half and pay the half payment every two weeks. What is basically happening is you are making twenty-six half payments, which equals one extra payment a year. This method will cut several years off the life of your mortgage loan and will save you thousands of dollars off the cost of your home. This method is know as the bi-weekly mortgage payment system.
Why do we say this is the best? Because once it's set up you will do it. Unless you are incredibly disciplined it is very difficult to be able to make the extra principal payments. The bi-weekly also offers an extra service in conjunction. At the end of each year the company will audit your mortgage account to be certain that your are getting proper credit for your extra principal payments. This service alone can be worth a lot of money to you. It would absolutely shock you to know how many mistakes lenders have made in calculating the mortgage balances on customer accounts. The Federal Government estimates it to be in the billions.
The bi-weekly and yearly auditing service has a one time fee of $495.00 to set up. From there on out, they will collect half your mortgage payment every two weeks and audit your mortgage account every year to make certain the lender has calculated it correctly. We highly recommend you take advantage of this service, it is well worth the small fee. For more information please call us and we will mail you more specific information.
The actual selection of the proper loan is the most critical of all of the choices you will make in lowering your cost of ownership. The first thing you need to decide is how long will you really want to own the home? Your answer can really help to determine what type of loan is best for you. Let's say you are only going to want to keep the home for about six years. You also are uncomfortable with your payments going up and down so you would like to have your interest rate fixed. Rather than getting a thirty year fixed rate mortgage we would recommend you use a 7/1 ARM. The 7/1 ARM will give you a lower interest rate, than the thirty year fixed rate mortgage, for seven years and after that time it turns into and adjustable rate mortgage.
The benefit to you in this scenario would be a lower monthly payment for seven years; however, in this example you know you are only staying six years so the savings to you is almost like free money. This is only one example of how to use the proper loan to help save you thousands of dollars on your mortgage.
Now combine this with the thirty year fixed rate mortgage payments on the 7/1 arm loan. With the extra money going toward your principal amount, in six years when you are ready to sell, you will have paid down your mortgage drastically and will have more money as a result to put down on your next home. Proper selection of loan types and additional principal payments can save you thousands of dollars.
The last component in saving money in finance charges is how to structure the closing costs for your loan. We touched earlier on the costs associated with a mortgage. Now let's look at some ways to optimize paying for these closing costs.
There is an inverse relationship between closing costs and interest rates. In other words if you pay higher closing costs, all other things being equal, you will have a lower interest rate. If you pay lower closing costs you will have a higher interest rate. Again it comes down to how long are you really going to keep the home? For example, lets say you are planning to keep your home for only two years. In this example we would recommend a no cost 2/1 buy down. Here is how it works, the interest rate is 2% lower the first year and 1% lower the second year. Now how do we get it to be a no cost mortgage? We raise the interest rate up to get the lender to cover all the closing costs. Not very many mortgage people out there offer the no cost loan; however, when we tell people we do they find it hard to believe that it exists.
Let's say current thirty year interest rates are at 8%, the 2/1 buy down would drop down to 6.375% the first year, 7.375% the second year and 8.375 years three through thirty. We would do is raise the interest rat to 6.875 the first year, 7.875 the second year then you are ready to sell your home. You have just saved about four thousand dollars in closing costs and about three thousand dollars in interest charges over getting a thirty year fixed rate mortgage. That is seven thousand dollars you saved by simply selecting the right combination of loan types and pricing options.
We are running quickly through a lot of information here, but, please call us with your specific situation and we can look at all sorts of options for you. The key here to keep in mind is you do not have to stick with any one type of loan and you will save a lot of money by using any technique to pay down the principal amount faster. We prefer a bi-weekly payment program because it is automatic and saves our clients a great deal of money.
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