Lowering the Total Cost of Your Home Mortgage
Posted by admin on May 7, 2009
It is uncomplicated to save money on your home mortgage. Whether you want to save money over the entire term of the home mortgage or drop your monthly payments, mortgages offer several ways to make your life easier.
The first decision you have to make is, do you want to reduce your total payment or your monthly payment? These goals are opposed. Because interest compounds, making a lower total payment means making a higher monthly payment, and making a lower monthly payment increases the amount of money you will eventually pay to your lender.
If you want a lower total payment, the solution is easy: Pay a little more each month. The extra money goes directly to your principal, so in the next month you accrue less interest and pay off more principal, which drops the following month’s interest even more. The difference is small at first, but within a few years it accumulates until you are paying noticeably less interest than you were. If you pay only $100 a month extra on a $200,000 home mortgage with a thirty year term, you will pay off the loan nine years early and save $72,000 in interest payments. If you cannot add money every month, add it when you can, or make one large extra payment a year. The impact on the amount you pay over the life of your loan will be powerful.
You do not need permission from your lender to pay extra on your home mortgage. However, if you want to drop your monthly payment, you will need your lender’s help to refinance. To lower your monthly payment when you refinance, you will need a lower interest rate (ideally two or more points less than your current rate), and you may need to add time to your term as well. Be cautious about lengthening the term of your home mortgage. Because of interest compounding, adding time to the term will not decrease the monthly payment proportionately. For example, a $100,000 home mortgage with a 5% interest rate and a 15 year term will cost $788 per month. Doubling the term more than doubles the amount of interest you will pay over the term of the loan, but drops your monthly payments by only $252, or less than a third. If your family is strapped financially, then this is a significant savings for your monthly budget, and may even enable you to keep your home. However, once you are less strapped, it makes good financial sense to pay a little extra each month to decrease the total sum you will owe on your mortgage.
As you can see, saving money on your home mortgage is easy, but requires tradeoffs. If you want to save in the long term, you must spend in the present, and vice versa. Choose which one is best for your financial situation, and keep in mind the tradeoffs you make as you manage your home mortgage.
Different Types of Home Mortgage
Posted by admin on May 2, 2009
There is an array of home mortgages available to buyers. Even first time buyers can find a mortgage tailored to their needs. However, to pick the right type of home mortgage for you, you need to know what your loan options are. This brief guide will explain the most common types on the market today.
The interest rate on an adjustable rate mortgage (ARM) lowers and rises in tandem with fluctuations in the state of the economy. Your home mortgage’s interest rate rises if the prime interest rate rises, and falls if the prime interest rate falls. This lets you get the maximum benefit from periods of low interest, but also means that if the prime interest rate rises sharply, your interest rate and monthly payments will rise with it. Because the risk of rising or falling prime interest rates rests on you, not on the bank, banks offer lower introductory interest rates on adjustable rate mortgage loans than on fixed rate mortgages.
The interest rate on a fixed rate home mortgage does not change over the term of the loan; it is set, or fixed. This cushions you from the shock of skyrocketing interest rates, but also prevents you from taking advantage of falling interest rates. Banks expect that at some point during the term of your loan, the prime interest rate will rise above the interest rate of your mortgage, and the bank will be required to make up the shortfall itself. Because banks must budget for this eventuality, they offer higher interest rates on fixed rate mortgage loans than on adjustable rate mortgages.
A convertible home mortgage loan begins as an adjustable rate loan, but you have a period of time during which you are allowed to convert to a fixed rate. This is a good type of loan to choose if interest rates are high but are expected to drop. You can enjoy the comparatively low interest rate of an adjustable rate home mortgage, then lock in an attractively low fixed rate for the rest of the life of the loan.
A balloon home mortgage begins with an unusual introductory period during with you pay a fixed rate that is almost as low as that for an adjustable rate mortgage loan, instead of paying the higher interest rate of a normal fixed rate loan. However, when the introductory period ends, you owe the total unpaid balance of the loan. Balloon loans are ideal for real estate investors who plan to resell the property before the end of the introductory period, or for homeowners who plan to refinance within the next few years.