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1. Do not pay high fees to refinance or to get a new mortgage loan 2. Do not pay points to buy an interest rate down 3. Do not pay to make biweekly (every two weeks) payments 4. Avoid variable rate loans 5. Set your loan goal 6. Shop around Mortgage Payment Calculator
1. Do not pay high fees to refinance or to get a new mortgage loan.Financial companies that want to charge you thousands of dollars to refinance or originate your mortgage loan are swindling you. They make money by selling your loan and from the interest you pay. My best advice is to shop around and negotiate for the most favorable terms.
Dont go to your favorite bank and pay them a big refinancing, loan origination, or closing cost fee because they are a nice bank and you trust them. They will more than likely sell your loan to a financial institution thats out of state anyway. Trust yourself instead, make the best no closing cost or low closing cost loan you can.
2. Do not pay points to buy an interest rate down.It would take you over a year to pay 1 point off ($1,000 in the typical mortgage loan). Now if you sell your house in three years, would you rather of had that thousand dollars go to equity or to your lender as a fee? Shop interest rates, get the lowest you can without paying points.
Something to think about. How do you know you will stay in the house long enough to make buying the points worthwhile? How do you know interest rates will not fall in the next year to the point rate ? In a year, you might be able to refinance for rates lower than the point rate.
3. Do not pay to make biweekly (every two weeks) payments.I think some banker thought this one up. Mortgage loans are paid on a monthly basis over a period of 48 weeks (12 months X 4 weeks). Aha! But there are 52 weeks in a year! Of course. There are actually 4 weeks you do not make a house payment! If you make a monthly payment of $800, there will be one four week period when you do not make a house payment and will have $800 to apply directly to the loans principle or to whatever (vacation?).
Now along comes someone and says, Hey you can pay off your loan faster if you make 26 biweekly payments a year instead of 12 monthly payments. And guess what? Your payments will be lower. Both statements are partially true, however you are surrendering your choice to make your own decisions.
In actuality there is no difference in making 26 biweekly payments a year versus 13 monthly payments a year (remember your extra $800?). Your payments are not lower under either method nor is there any difference in interest paid, equity accumulated, etc. The question is do you want to have that extra months payment automatically applied to your loan, or do you want to have the choice of using that extra payment for something else?
If you like the forced payment method great, but it sure is nice to have that money available to supplement your cash flow. However, dont pay anything to set up a 26 week payment schedule. Call or write your lender and tell them to apply your extra payment against the principle of the loan (otherwise it is considered an early payment) and you have accomplished the same thing - free.
4. Avoid variable rate loans.
Unless you like to gamble, leave variable interest and balloon loans alone. The variable rate is designed to protect the lender. It does nothing for you as the borrower except allow you to pay more when interest rates go up (well in the short run your payment is a little lower). I for one like fixed payment amounts, because I manage my cash flow. If a bank raises my mortgage payment, I am no longer in control of my payment amount. I also do not want to be refinancing a variable rate loan in the face of raising interest rates.
5. Set your loan goal.
Decide on the type of loan you want and shop for it. You cannot make comparisons of interest rates, fees, and closing costs, unless you decide on the type of loan (fixed or variable interest rate) and the number of payback years.
For example, my goal is always to get the lowest fixed interest rate mortgage I can find with the lowest total fees (origination fee, points, closing costs, mortgage insurance etc.) in the 20 to 30 year range. So when I call a mortgage lender or search for a loan online I would ask, "What is your lowest fixed interest rate in the 20 to 30 year range? What are the total fees I have to pay up front and to close the loan? Do you have a "no fee" mortgage loan?".
*Warning* - Never shop for a loan based on the lowest payment. If you do, you will most likely wind up with a variable or balloon type loan. These types of loans should not be used unless you are sure you understand how they work and are willing to run the risk of your mortgage payment going up if interest rates rise.
Instead, figure out the type of loan you want (fixed or variable), and the term (number of years), and shop for the lowest interest rate with the lowest total fees.
<If you need help figuring out how much you can borrow and what your approximate payments will be, we have a Mortgage Payment Calculator available on our site.>
6. Shop Around.
After you set your loan goal, I suggest you get quotes from several lenders and select the lender which will offer you the best product that meets your loan goal (remember this does not mean lowest payment -see Step 5 above). The internet make it easy to get online mortgage refinance and loan quotes. There is no reason to limit yourself to local banks as they will probably sell your loan to an out-of-state bank.
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