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1) Do Your Homework -- It Pays
Whether you're financing a new home, or refinancing, you'll have plenty
of choices. In addition to banks, you may be able to borrow from
the seller, a relative, an insurance company, or through a mortgage
broker. Create a chart to compare your loan options. (See sample chart below.)
2) "Guesstimate" How Long You'll Own This Home
The best loan for a short term owner is not necessarily best for a
long term owner. Settling in for life? Consider a mortgage with higher
up-front costs (called points), because the interest rate
will be lower. Moving in 5 to 7 years? You may be better off not
paying points -- or taking an adjustable rate mortgage (ARM) with
a low "introductory" rate.
3) Tell The Truth: Are You A Risk Taker?
ARMs are unpredictable. Unless you'll be moving soon, or are a gambler,
avoid them -- unless you can protect yourself from the risk of
future rate hikes. How? Read on.
4) Consider A Convertible
Convertible mortgages give you the opportunity to bail out of an ARM
if rates climb. Generally from the end of your loan's first year,
to the end of year 5, you can convert your ARM to a fixed rate --
for a fee, of course. It'll be tied to the then current rates, so
it may not be as low as the fixed rate you could take out now. But,
you'll be protected from yet higher interest.
5) Should You Do The Two-Step?
Two-step loans, also called "7-23s," are the flip side of
convertibles. You get a fixed rate loan, typically for the first 7
years. Then it becomes an ARM for the remaining term. If you sell
in less than 7 years, higher interest rates won't effect you, nor
will you benefit if rates drop. But if you keep the house past year
7, you'll face an unpredictable 8th year -- and future.
6) Going Places? Consider GPMs
Graduated Payment Mortgages start out with a relatively low monthly
payment which then increases. A GPM would let you buy a more expensive
home, on the theory that your salary will rise as payments increase. If
the theory's wrong, you could lose your home. Watch out! Also make
sure the monthly payment is high enough to cover the interest --
or your debt will increase every month.
7) Are You Who They Think You Are?
Get the address of the credit agency that local lenders use. Order
a copy of your credit report before applying for a loan. It
may cost a few bucks, but correcting errors now, can save you
grief, and money, later.
Don't look so good on paper? Self-employed? Ask local lenders about "no-peek" loans. You'll pay a higher rate -- in exchange for more privacy.
8) How Deep Can You Go?
Most real estate brokers will quickly tell you how much they think
you can borrow. But -- with an accurate credit report -- local
lenders should be able to give you a much firmer sense of how much
they'll commit. Why dream of a home that'll be out of your reach?
9) Take Your Time -- 30 Years Versus 15
10) Make It A Point To Get Tax Advice
11) Compare Total Costs For Each Possibility
You also need to factor in whether you have the cash on hand to pay
points, and/or an adequately high, steady enough income to consider
15 year loans. Then, for your remaining options: Find out what
the total cost would be by the time you'd pay each loan off.
For example, given the options presented below, if I were moving in
5 years, I'd take the 6.25% ARM, even though it has points, because
the rate is so low. I'd more than re-coup my $2,000 in the 5 years. But
if I expected to own for 15 or 30 years, I'd take the 30 year fixed
rate at 8.5% -- and pay it off as quickly as I could.
Note: For ARMs, be prudent, and assume that interest will
increase at the maximum rate allowed, every change date. As you'll
see below, they can get very costly!
12) Decide NOW To Invest In Your Mortgage
If you plan to invest in your next loan, pick an amount you know you
can afford -- even if it's pocket change -- and compare your
options with that amount built in to the monthly comparison figure.
Notes: All calculations were made with The Banker's Secret Software, but can be done with other real estate programs. Lenders should be willing to give you figures based on the full term of the loan, as well as on the number of years you plan to keep the house. Your Work Sheet should only be used to help you pick a loan. Once you've gotten approval, you need a schedule that is based on the actual amount you borrow and the actual monthly payment, not the comparative figures that build in points and closing costs.
The Pocket Change Windfall: Each of our 34 back issues offers painless ways to get out of debt and save on the many expenses that confront us all -- taxes, credit card bills, mortgages, insurance, food, you name it. You can get all 34 for just $29.95 -- that's less than $1 each. To order, you can use our secure server, call 845-657-8245, or write to us at:
Unless you're
The tax laws about points are very confusing. For example, if you're
getting a new mortgage, write a separate check to the lender to pay
the points. Otherwise, you'll have to deduct them slowly, over the
loan's full term (unless the loan is for a secondary residence, in
which case, points can't be deducted up front). If you're refinancing,
points are
To decide which loan is best for you, set up a table like the one
below. The figures you compare should include closing costs and points
-- we call them Comparative Amounts and Monthly Comparisons.
Even small advance payments will earn you a high return, completely
guaranteed, while you pay off your mortgage years early. For example,
$25 a month will save you between $25,000 and $30,000 in interest
on the 30 year loans listed below. That's $25,000 to $30,000 tax-free,
because it's money you've saved,
Sample $100,000 Mortgage Comparison Work Sheet
Term
30 Year
30 Year
30 Year
15 Year
15 Year
30 Year
30 Year
Rate
Fixed
Fixed
Fixed
Fixed
Fixed
Adjustable
Adjustable
Interest Rate
9.125%
8.75%
8.5%
8.875%
8.375%
7.375%
6.25%
ARM: Change Period
n/a
n/a
n/a
n/a
n/a
2 Years
2 Years
n/a
n/a
n/a
n/a
n/a
2%
2%
n/a
n/a
n/a
n/a
n/a
6%
6%
Points (in percent)
0
2.125%
3.125%
0
3.375%
0
2%
Points (in dollars)
0
2,125
3,125
0
3,375
0
2,000
Closing Costs
2,500
2,500
2,500
2,500
2,500
2,500
2,500
Comparative Amount
102,500
104,625
105,625
102,500
105,875
102,500
104,500
Monthly Comparisons
834
823
812
1032
1035
708
643
Total Cost:
148,411
149,500
149,591
143,827
146,008
147,392
144,291
231,739
230,508
228,664
185,762
186,273
271,224
257,740%
300,221
296,304
292,373
387,307
361,347
Loans Out on a Clunker or Two, & a Bad Case of the "I'm Tired of Living Payday to Payday" Blues.
PO Box 78
Elizaville, NY 12523
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