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  How To Get A Low-Cost Mortgage  

Here are some strategies that can reduce your mortgage costs:

  • Eliminate PMI.  You can stop paying for private mortgage insurance when your home equity rises above about 20%.  Here are two explanatory pages: PMI Tips, How To Remove PMI.

  • Adjust the length.  You could do a 30-year mortgage to lower your monthly payments, or do a 15-year mortgage to pay less interest and pay it off sooner.  Terms of 10, 20 and 40 years are also possible though they are usually unadvertised.

  • Interest-only loans.  With this type of ARM you only pay interest for the first 5-7 years, then your payments jump as you start paying off the principal.

  • Raise Your Credit Score First.  This is especially important if your credit score is shaky.  You can improve your credit by paying bills on time, paying down credit cards, protesting inaccuracies in your credit report, and keeping a steady job.  Another way to improve your mortgage terms is to persuade someone with excellent credit to co-sign the mortgage loan.

  • Low-fee loans.  Try to find a loan that costs you only $1,500 to $2,500 in fees to refinance, rather than the many thousands that some lenders charge.  You can fold these fees into the loan, instead of paying them up front.

  • "Paying Points."  The idea is to pay your lender in advance to give you a lower interest rate.  Paying one point means paying 1% of the loan amount in advance.  There are several advantages:  points paid are tax-deductible, you'll pay lower monthly payments, and a higher percentage of your money will go towards paying down your loan balance instead of just paying interest.  Ask lenders whether they will extend this offer to you and read Paying mortgage discount points: a primer to determine whether you'll benefit from this strategy.  As a rule of thumb, paying a point is worthwhile in these cases:

    • You stay at least three years in the home, if you can get a 0.375% interest rate reduction;
    • Over five years if it's a 0.25% reduction;
    • Over ten years if it's a 0.125% reduction.

  • Tax deductions.  After you've financed your home, remember that you can deduct mortgage interest but not loan fees.  If you "pay points", you can take a deduction for that.

  • Assumable mortgages.  Unlike most mortgages, assumable mortgages can be taken over by the person you sell your home to.  If interest rates go up, your assumable mortgage would be a great selling point.  Assumable mortgages are uncommon in America, but usual in Canada.

  • Closing Costs.  Most of these fees are negotiable if you're persistent.  You can get tips to help you Save Thousands on Closing Costs.  You might also fold your closing costs into your mortgage, which will increase your new monthly payment by around $10 to $20 (see Finance Settlement Costs in Mortgage Refinance.

  • Prepayment Penalties.  Lenders will usually lower your rate by 0.125% to 0.5% if you agree to a prepayment penalty lasting three to five years. The downside: if you refinance during that time, you'll pay a penalty of 2-3% of the loan value.  A penalty clause should state that you're not penalized if you sell your home (insist on it!)  Here's an informative Prepayment Penalty Mortgages article.

  • "Jumbo Loans."  For 2007, a Jumbo loan is defined as any mortgage over $417,000 (for single-family homes in the continental U.S.; the limit is 50 percent higher in Alaska, Hawaii, Guam and the U.S. Virgin Islands.)  A jumbo loan bears a slightly higher interest rate than a normal loan.

How to use calculators.  It's simpler than it looks:  You just input numbers into the  yellow  boxes, click the Get Results button, and the calculator estimates your expenses in the  red  boxes.  Some other things to know:
  • Some calculators have  green  boxes, where the calculator estimates ways you'll gain income. 
  • The  yellow  boxes are pre-filled with some typical numbers, which you can change if you like. 
  • You might find it easiest to start by clicking the Get Results button, to see how it all works.

Mortgage Shopping Calculator
How to choose a mortgage:  You want to buy a house and think you'll live there for years.  You're considering a loan for $, (the principal of the loan) at a % fixed interest rate over a term of years.  You'll pay $ closing costs up front, not folding those costs into the loan.

To calculate: 

Your future payments:
$ will be your monthly payment. 
$ is the total interest you'd pay over the full term of the loan.
$ would have been your monthly payment, if you'd folded in closing costs.

Here are your other options, along with the savings you can expect compared to the mortgage shown above (note: a negative savings number means you would have to pay extra instead of saving):
  pay $ monthly on a 40-year loan at  %, saving $  over years.
  pay $ monthly on a 15-year loan at  %, paying $  more over years. 
  pay $ monthly on a "3/1" loan at  %, saving $  over years.
  pay $ monthly on a "5/1" loan at  %, saving $  over years.
  pay $ monthly on a "10/1" loan at  %, saving $  over years.
  pay $ monthly on an ARM loan at  %, saving $  over years.
  pay $ on an interest-only loan at  %, saving $  over 5 years, then
  pay $ monthly for the last years.

      Note:  more Mortgage Calculators are available for various situations.

9. How To Refinance Your Mortgage

(Next Gem: Stay Alert For Refinancing Opportunities)

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