There is a lot of talk in the mortgage world about GPARMs, GEMs, and RAMs, which are all varieties of the adjustable-rate home mortgage loan. Unfortunately, all these mortgages have their gimmicks, indexes and possible rising monthly payments. These are designed for folks who can't afford the home they want, which includes a lot of us. Therefore, all these varieties of the adjustable-rate mortgage are devices to get the monthly payment down to something a home buyer can qualify for. I’m not going to be talking about any of these things because none of them will save you any money. What I want to share with you are simple, uncomplicated ways that you can save (or make) thousands of dollars on your home mortgage.
The 15-Year Mortgage
Most people think that cutting a loan term in half will double the monthly payments, but this is not so. For a $135,000 mortgage paid out over 30 years at 8 percent interest, the monthly cost will be $990.58. If the loan term was for 15 years, then the monthly payment would be $1290.13, which is only an increase of $299.55, or 30 percent. This is the case because less principal is outstanding over time and, therefore, interest costs are greatly reduced. The potential interest on the 30-year loan is $221,609.58, while the possible cost of a 15-year loan is only $97,223.45—a substantial savings of $124,386.13.
Imagine, a savings of $124,386.13. But it is actually better than this, and it goes back to the concept of risk. The longer the loan term, the greater the risk to the lender. On the other hand, shorten the term of the loan and the lender has less risk. This means that a lender will probably grant a lower interest rate. In the above example, the interest rate was the same—8 percent. Although many lenders will be happy to charge the same interest rate for both their 30-year and 15-year loans, a smart borrower can probably do better, and who says you aren’t smart?
If you reduce the interest rate on the 15-year loan to 7.5 percent, you will then have a monthly payment of $1251.46, an increase of $260.88 over the 30-year mortgage. Your potential interest costs would drop to $90,264, which could cause you to save as much as $131,345.58 over the 30-year loan.
Are you excited yet? I mean, $131,345.58 is a lot of money! Unfortunately, for first-time home buyers, or those buying on the brink of affordability, that extra $260.88 may just be more than you can afford. Cheer up! You’ve learned something that didn’t cost you a cent that hopefully you’ll be able to use when you buy that 2nd or 3rd home in the future. More than likely, you’ll make a nice profit on your 1st home and then you’ll be in a position to work this strategy. But, there is something else you can do that could work almost as well.
The Back-Door 15-Year Loan
If you can’t afford/qualify for a 15-year mortgage, then you may be able to eliminate your problem by creating a back-door 15-year mortgage. It works like this:
- Negotiate a 30-year mortgage—either a fixed-rate or adjustable-rate loan.
- Make sure the loan documents state that the mortgage can be prepaid in whole or in part, at any time, and without penalty.
This means that you only have to qualify for a 30-year mortgage, which will be much easier than qualifying for a 15-year one. As your income increases over time, you can voluntarily increase your monthly mortgage payment. If, as you're able, you continue to increase your payments, then you may be able to pay the loan off in 25, 20, or 15 years, as you elect. The major advantage of this strategy is that you are not obligated to make large monthly payments. When money is tight, just send in the payment matching the 30-year pay-off, which is all the lender can legally expect. Still not sure that you’ll be able to do this any time soon, then there is another strategy I want to tell you about before someone tries to charge you a lot of money to implement it. I know some otherwise smart people who have excitedly given their money away to folks who provided them with the same information I am about to give you here for free.
The Bi-Weekly Mortgage
The bi-weekly mortgage is just another one of those financial concoctions spawned by lenders and borrowers trying to come up with a better financial mousetrap. Basically, instead of 12 monthly mortgage payments per year, borrowers make bi-weekly payments (26 a year) to the lender. Each of these bi-weekly payments is half of the regular monthly payment. The borrower feels like he's just paying what he normally would on monthly payments, but he is actually making the equivalent of one extra monthly payment per year. This results in faster loan amortization, shorter loan terms, and reduced interest costs. Without going through all the figures, because the math done to keep up with this is quite complicated, the equivalent of one extra monthly payment per year causes a 30-year mortgage to be paid off in approximately 18 years. Other than competition, no lender in his right mind would want to create one of these complicated loans, unless he could make some extra money on the deal, and this is exactly what many lenders are doing. In fact, I got a letter from my home mortgage lender informing me of this plan and how it would only cost me $400 to implement it. They actually wanted me to think they were doing me a favor. Believe me, they weren’t. This has also spawned a mini-industry of “consultants” who will be happy to take your money for their sagely advice and assistance. For $400, plus extra charges per payment, these consultants will collect your money from you on a bi-weekly basis, agreeing to pay your lender full and timely payments, including the extra payment at the end of the year. In the meantime, of course, they have the short-term use of your money which has been deposited in their account. No wonder these “consultants” are doing so well financially. But, at whose expense? Unfortunately, most folks are so ignorant of their home mortgages, they actually think these folks are providing them with a “service.” In addition, suppose these folks don’t do what they say they’ll do, what then? They could go bankrupt or even abscound with your money, and then you’re not only out the money you paid them, but your lender is wdemanding his payment(s). In this case, you’ve got real problems.
Now, I’ve said all that to say this: Why don’t you just do it yourself? Your lender may be willing to accept bi-weekly payments without charging you any extra fees. Ask him. If he does, then get started. If he wants to charge you something extra for bi-weekly payments, then make your bi-weekly payments to yourself, then pay your regular monthly mortgage payments, and at the end of the year you’ll have enough for that extra monthly payment. Now that wasn’t hard, was it? If you still feel compelled to give $400 away, then give it to charity or some other worthy cause. If you don’t have enough discipline to work this simple strategy, then go out and negotiate an 18-year mortgage, and you’ll come out in almost exactly the same place.
I am not a financial consultant and do not make money giving financial advice. I do like passing on what I consider to be helpful information. Therefore, I hope this little article has been of some help to you. If you’ve found this page through a search engine, or some other means, and have not arrived on my site through the front door, then I want to invite you to do so. I’m a preacher of the gospel, and this is my personal web site. It mostly consists of religious articles, but I also deal with other subjects as well. Just click on the “Return home” link below and it will take you to a list of subjects you can find on this site. Thank you for visiting.