Mortgage 101

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Mortgage 101 is for those of you who are new to the world of money. This should explain some details about a mortgage. When you are in the market for homes for sale, the first thing most people do is get pre-qualified from a bank. IMPORTANT: If you don’t like the terms from one bank, you can shop around. Most banks have different terms and rates in order to compete with others. Going to a mortgage broker can be helpful, just ask if they are a captive agent. Captive agents have contracts with certain mortgage companies and are not out for your interests. You want a non-biased, non-captive agent who can give you many options.

When you find a company you want to deal with and get approved, you should walk out with a “Truth in Lending” statement once you have locked in an interest rate. This statement shows two important items – the annual percentage rate and the total payback. The APR can be locked in now before you leave or you can wait to lock it in if the rate is dropping like it has been doing for the last couple years. The lender can tell you what the rate is doing. If you’re getting a mortgage anyway, half a point can make a big difference. The total payback is not a typo, you will pay back that much if you stick to the amortized schedule they have you on. There are ways to cut that number down. Check out my article, “Advantages of an LOC”, to learn how to beat down that figure.

The thirty year mortgage was created after the great depression under the Fair Housing Act to boost the housing market and help people get into a real home. It started as 20% financed if the homeowner can come up with 80% of the home price. Now we have 80% financed and 20% down. The structure of a standard mortgage is set up to pay the bank most of the interest in the first half of the mortgage and pay off most of the loan principle in the second half. You can’t change the way banks structure a loan or the numbers on the truth in lending statement, but you can take advantage of other rules.

Today’s loan contracts don’t have an early payoff penalty clause; if it does, don’t accept it. There are too many other banks out there that don’t. The object of this game is to push the loan past the first 15 years on the amortization schedule to the latter half where you are paying mostly principle, not interest. The amortization schedule is based on the balance of the principle balance each month. When you pay extra money on a mortgage payment, that jumps you up on the schedule and any interest scheduled to be paid between the old balance and the new balance is canceled. Simply adding an extra $100 to each payment can cut seven years off the payoff date and save thousands of dollars. I managed to pay an extra $11,000 on my mortgage in one year and that canceled $15,000 in interest using a line of credit. My new payoff date jumped to 12 years earlier. Any money over the scheduled payment goes to principle. Just because you get approved for “X” amount of dollars doesn’t mean you have to tie that much up in a house. Negotiate a house to around 80% of what you were approved for; you will be surprised how much a seller will come down on a price. Also, the longer the loan period, the more interest will be paid. Go with the shortest period that still offers a comfortable payment (if it is your personal home).

Another option is to look for private lenders (investors). Today’s market has banks holding out for only the customers with $200,000 in the bank and a 750 credit score. Many banks won’t approve the average person with a few dollars in savings. There are many investors out there looking for a good investment for their money and a homeowner like you might do the trick. Their investment grows better than a CD and you get better terms than the bank was offering. Everyone is happy. We can provide the owner financing you desire.