Here are some strategies that can reduce your mortgage costs:
Eliminate PMI.
You can stop paying for private mortgage insurance when
your home equity rises above about 20%. Here are two
explanatory pages: PMI Tips,
How To Remove PMI.
Adjust the length. You could do a
30-year mortgage to lower your monthly payments, or do a 15-year
mortgage to pay less interest and pay it off sooner. Terms
of 10, 20 and 40 years are also possible though they are usually
unadvertised.
Interest-only loans. With this type of
ARM you only pay interest for the first 5-7 years, then your
payments jump as you start paying off the principal.
Raise Your Credit Score First. This is
especially important if your credit score is shaky. You can
improve your credit by paying bills on time, paying down credit
cards, protesting inaccuracies in your credit report, and keeping
a steady job. Another way to improve your mortgage terms is
to persuade someone with excellent credit to co-sign the mortgage
loan.
Low-fee loans. Try to find a loan that
costs you only $1,500 to $2,500 in fees to refinance, rather than
the many thousands that some lenders charge. You can fold
these fees into the loan, instead of paying them up front.
"Paying Points." The idea is to pay your
lender in advance to give you a lower interest rate. Paying
one point means paying 1% of the loan amount in advance.
There are several advantages: points paid are
tax-deductible, you'll pay lower monthly payments, and a higher
percentage of your money will go towards paying down your loan
balance instead of just paying interest. Ask lenders
whether they will extend this offer to you and read Paying mortgage discount points: a primer
to determine whether you'll benefit from this strategy. As
a rule of thumb, paying a point is worthwhile in these
cases:
You stay at least three years in the home, if you can get a
0.375% interest rate reduction;
Over five years if it's a 0.25% reduction;
Over ten years if it's a 0.125% reduction.
Tax deductions. After you've financed
your home, remember that you can deduct mortgage interest but not
loan fees. If you "pay points", you can take a deduction
for that.
Assumable mortgages. Unlike most
mortgages, assumable mortgages can be taken over by the
person you sell your home to. If interest rates go up, your
assumable mortgage would be a great selling point.
Assumable mortgages are uncommon in America, but usual in Canada.
Closing Costs. Most of these fees are
negotiable if you're persistent. You can get tips to help
you Save Thousands on Closing Costs. You
might also fold your closing costs into your mortgage, which will
increase your new monthly payment by around $10 to $20 (see Finance Settlement Costs in Mortgage
Refinance.
Prepayment Penalties. Lenders will
usually lower your rate by 0.125% to 0.5% if you agree to a
prepayment penalty lasting three to five years. The downside:
if you refinance during that time, you'll pay a penalty of 2-3%
of the loan value. A penalty clause should state that
you're not penalized if you sell your home (insist on it!)
Here's an informative Prepayment Penalty Mortgages article.
"Jumbo Loans." For 2007, a Jumbo loan is
defined as any mortgage over $417,000 (for single-family homes in
the continental U.S.; the limit is 50 percent higher in Alaska,
Hawaii, Guam and the U.S. Virgin Islands.) A jumbo loan
bears a slightly higher interest rate than a normal loan.
How to use calculators.
It's simpler than it looks: You just input numbers into
the yellow boxes, click the Get
Results button, and the calculator estimates your expenses in
the red boxes. Some other things to
know:
Some calculators have green boxes, where the calculator
estimates ways you'll gain income.
The yellow
boxes are pre-filled with some typical numbers,
which you can change if you like.
You might find it
easiest to start by clicking the Get Results
button, to see how it all works.
Mortgage Shopping Calculator
How to choose a mortgage:
You want to buy a house and think you'll live there for
years. You're considering a loan for
$,
(the principal of the loan) at a
%
fixed interest rate over a term of
years. You'll pay
$
closing costs up front, not folding those costs into the loan.
To calculate:
Your future payments:
$ will be your monthly payment.
$ is the total interest you'd pay over the full term of the loan.
$ would have been your monthly payment, if you'd folded in closing costs.
Here are your other options, along with the savings you can expect compared
to the mortgage shown above (note: a negative savings number
means you would have to pay extra instead of saving):
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