Saving A Lot Of Money On A Mortgage Isn' T All That Complicated

Saving a lot of money on a mortgage isn' t all that complicated.

Get a higher interest rate and pay more. Get a lower interest rate and save. So, shopping around for the best interest rate can be very beneficial to your bottom line. Though it can be very confusing, don' t overlook the number of points you pay on your mortgage. Have you ever wondered where a point enters into the equation? Even a lower interest rate mortgage can go from being a great deal to a bad one because of points.

First of all, what is a point? Let's see if we can un- muddy the waters where points are involved and give you an edge when you are shopping for a mortgage. A point is 1% , period. With a 2 1/ 2- point charge, a$ 200, 000 mortgage will cost you, 2 1/ 2% of$ 200, 000 or$ 5, 00 You may wonder what happens at your closing. If you were receiving a$ 200, 000 mortgage on your home that called for a 1- point payment at closing, you would be paying 1% of$ 200, 000 or$ 2, 00 More commonly, a mortgage writer will charge you 2 or 2 1/ 2- points. Does that$ 5, 000 come right out of your pocket and go directly into the lender's pocket? In other words, that$ 200, 000 mortgage at 2 1/ 2- points becomes a$ 205, 000 mortgage.

Not exactly: in the case of a refinance, the$ 5, 000 is taken out of the cash back you would receive at closing, but when purchasing a property, the$ 5, 000 is added on to your mortgage principle amount. Now, let's suppose you were offered this$ 200, 000 mortgage with 2 1/ 2- points charged at a 6% interest rate and the loan was for 30 years. Which is the better deal for you? At the same time, another lender offered you a$ 200, 000 mortgage at 7% for 30 years but this mortgage was a 0- points mortgage. With the 0- point mortgage, $200, 000 at 7% over 30 years, your monthly payment would be$ 1, 336To pay the entire mortgage off making monthly payments for 30 years would cost you$ 479, 010 The 2 1/ 2- point mortgage, which amounts to a$ 205, 000 mortgage at 6% over 30 years would only require a$ 1, 2208 monthly payment. Your required payment would be less by a little over$ 1000 each month and after the entire mortgage was paid 30 years later, you would have saved$ 36, 542 So, it looks like a no- brainer, you should go with the lower interest rate mortgage every time. To pay this mortgage in full by making monthly payments for 30 years would end up costing you$ 442, 468 As you can easily see, if you were looking for a mortgage for the long haul, the 2 1/ 2- point, 6% mortgage would be the way to go.

Right? What if you intended to sell this property very soon for a quick profit, a technique known as flipping? Well, not every time. If you only owned the property for a few months and only made a total of 2 payments on it, you would not have paid off any principle to speak of. You wouldn' t have to pay the extra$ 5, 000 if you had taken the no- point mortgage and so at closing, you would be paying$ 200, more profit for, 00Hence you! So, with the profit you made from selling your property, by taking the 2 1/ 2- point mortgage, you would be paying off the$ 205, 000 at closing.

If you were in the business of buying fixer- uppers and living in them while renovating them, you probably would be selling the property in less than 3 years. In a case like this, the 7% 0- point mortgage would be the more cost effective mortgage for you. Sometimes you wouldn' t need to hold the property for anywhere near 3 years. If you sold the property in 3 years exactly, neither mortgage would be a clear- cut money saver. What might swing the advantage to the 7% mortgage in this case, is that the interest portion of your monthly payments are tax deductible. At closing, you would owe$ 3, 5141 more on the 6% 2 1/ 2- point mortgage but you would have paid about$ 3, 600 less in monthly payments because, as you' ll remember, the 7% no- point mortgage has a monthly payment that is about$ 1000 higher. So, since the 7% mortgage requires more interest be paid, you would have a somewhat larger tax deduction.

If you are going to have the mortgage for a long time, the lower interest rate is definitely the way to go. The logical conclusion is, if you are getting a mortgage that you are sure you will only need for a short time, try to get a 0- point mortgage. The break- even point between 0- point and 2 1/ 2- point mortgages used to be at about 5 years. If you are intending to keep a mortgage for 3 to 5 years, the only way you would know for certain which would be the better choice would be to know how long you will need the mortgage for and then look at the proposed mortgages' amortization tables. Now, in this lower interest rate environment, it is more like 3 years. There is one last word of caution.

Paying a$ 500 monthly late charge every month will throw all the calculations off as well as risk your good credit rating. If you have decided that you will only need the mortgage for a short time and therefore intend to take the 0- point mortgage, make sure you will have no problem paying the higher monthly payment on time. Also, be very sure you are getting a mortgage that doesn' t have a pre- payment penalty. A pre- payment penalty would mess up the whole deal altogether.