Here is a little known strategy for saving money on mortgage interest.
You can give the mortgage lender some extra money when you negotiate the loan terms, and they will lower the amount of interest you may, and thereby also lower your monthly payment.
In most cases the trade is about one point or 1% of the interest principle for every 1/4% in interest that you won’t have to pay. For example, lets use a $500,000 loan. If you give the lender an extra $5000, that lender will drop your interest rate from say 4% to 3.750%. Now that could be a good deal for some folks and a very bad deal for others.
To begin with, it will take you just about seven years of lowered payments to earn back that $5000. This assumes that you didn’t put that $5000 to work earning some kind of return. Therefore, if you sell or refinance the loan in less than seven years, this deal is a loser for you.
On the other hand, lets say you are very certain that you will live in the house of at least 15 years. In that case you will make back your money double. In 21 years you will triple. If you stay in the house for the entire 30 years, you will have made back well over 4 times your investment.
The equation changes if the lender is willing to give a bigger discount for each point. It is possible that the lender will give you 3/8% off the interest rate for a point. This would be rare, but would change the equation dramatically. If you have the available cash to pay down the interest rate, the amount the lender will discount the interest rate will be your first question.
You aren’t limited on this idea, either. You could pay more points and drop more interest off the loan. If you paid two points or $10,000 on the example, you would see your money returned in just 6 years. Most lenders are not willing to go beyond about 4 points for this type of advantage.
Paying down your mortgage interest rate is especially valuable for homeowners who love the idea of a mortgage as forced savings. You could even use the monthly savings to pay off the mortgage faster, thereby saving even more over time. If the lender gave you ½% off for two points on our $500,000 loan example, you would save $142 per month. If you applied that to the loan, you would pay off the loan in just 27 years and 1 month with an interest savings of $34,400. This assumes you stay in the home for the entire 30 years.
When you use a sophisticated mortgage counselor like Bill Rayman, he can help guide you to wise decisions based on your plans and your personal risk characteristics. Call Bill Rayman today to discuss your mortgage needs: 424.354.5325