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12 Simple Things You Can Do to $ave on Your Next Mortgage
by Marc Eisenson

1) Do Your Homework -- It Pays
Whether you're financing a new home, or refinancing, you'll have plenty of choices. In addition to banks, you may be able to borrow from the seller, a relative, an insurance company, or through a mortgage broker. Create a chart to compare your loan options. (See sample chart below.)

2) "Guesstimate" How Long You'll Own This Home
The best loan for a short term owner is not necessarily best for a long term owner. Settling in for life? Consider a mortgage with higher up-front costs (called points), because the interest rate will be lower. Moving in 5 to 7 years? You may be better off not paying points -- or taking an adjustable rate mortgage (ARM) with a low "introductory" rate.

3) Tell The Truth: Are You A Risk Taker?
ARMs are unpredictable. Unless you'll be moving soon, or are a gambler, avoid them -- unless you can protect yourself from the risk of future rate hikes. How? Read on.

4) Consider A Convertible
Convertible mortgages give you the opportunity to bail out of an ARM if rates climb. Generally from the end of your loan's first year, to the end of year 5, you can convert your ARM to a fixed rate -- for a fee, of course. It'll be tied to the then current rates, so it may not be as low as the fixed rate you could take out now. But, you'll be protected from yet higher interest.

5) Should You Do The Two-Step?
Two-step loans, also called "7-23s," are the flip side of convertibles. You get a fixed rate loan, typically for the first 7 years. Then it becomes an ARM for the remaining term. If you sell in less than 7 years, higher interest rates won't effect you, nor will you benefit if rates drop. But if you keep the house past year 7, you'll face an unpredictable 8th year -- and future.

6) Going Places? Consider GPMs
Graduated Payment Mortgages start out with a relatively low monthly payment which then increases. A GPM would let you buy a more expensive home, on the theory that your salary will rise as payments increase. If the theory's wrong, you could lose your home. Watch out! Also make sure the monthly payment is high enough to cover the interest -- or your debt will increase every month.

7) Are You Who They Think You Are?
Get the address of the credit agency that local lenders use. Order a copy of your credit report before applying for a loan. It may cost a few bucks, but correcting errors now, can save you grief, and money, later.

Don't look so good on paper? Self-employed? Ask local lenders about "no-peek" loans. You'll pay a higher rate -- in exchange for more privacy.

8) How Deep Can You Go?
Most real estate brokers will quickly tell you how much they think you can borrow. But -- with an accurate credit report -- local lenders should be able to give you a much firmer sense of how much they'll commit. Why dream of a home that'll be out of your reach?

9) Take Your Time -- 30 Years Versus 15
Unless you're absolutely certain that you'll be able to meet the higher payment every month, take a 30 year loan -- and pay it off as if it were a 15. You'll enjoy substantial savings, and if money ever becomes tight, you'll be able to pay the lower 30 year amount.

10) Make It A Point To Get Tax Advice
The tax laws about points are very confusing. For example, if you're getting a new mortgage, write a separate check to the lender to pay the points. Otherwise, you'll have to deduct them slowly, over the loan's full term (unless the loan is for a secondary residence, in which case, points can't be deducted up front). If you're refinancing, points are only deductible over the life of the loan -- except if you use some of the money to pay for renovations -- in which case the points on that amount can be deducted immediately. Got it? If not, talk to your tax advisor BEFORE you get to the closing.

11) Compare Total Costs For Each Possibility
To decide which loan is best for you, set up a table like the one below. The figures you compare should include closing costs and points -- we call them Comparative Amounts and Monthly Comparisons.

You also need to factor in whether you have the cash on hand to pay points, and/or an adequately high, steady enough income to consider 15 year loans. Then, for your remaining options: Find out what the total cost would be by the time you'd pay each loan off.

For example, given the options presented below, if I were moving in 5 years, I'd take the 6.25% ARM, even though it has points, because the rate is so low. I'd more than re-coup my $2,000 in the 5 years. But if I expected to own for 15 or 30 years, I'd take the 30 year fixed rate at 8.5% -- and pay it off as quickly as I could.

Note: For ARMs, be prudent, and assume that interest will increase at the maximum rate allowed, every change date. As you'll see below, they can get very costly!

12) Decide NOW To Invest In Your Mortgage
Even small advance payments will earn you a high return, completely guaranteed, while you pay off your mortgage years early. For example, $25 a month will save you between $25,000 and $30,000 in interest on the 30 year loans listed below. That's $25,000 to $30,000 tax-free, because it's money you've saved, not earned. For more on this subject, see my book, The Banker's Secret.

If you plan to invest in your next loan, pick an amount you know you can afford -- even if it's pocket change -- and compare your options with that amount built in to the monthly comparison figure.

Sample $100,000 Mortgage Comparison Work Sheet
Term 30 Year 30 Year 30 Year 15 Year 15 Year 30 Year 30 Year
Rate Fixed Fixed Fixed Fixed Fixed Adjustable Adjustable
Interest Rate 9.125% 8.75% 8.5% 8.875% 8.375% 7.375% 6.25%
ARM: Change Period n/a n/a n/a n/a n/a 2 Years 2 Years
Interest Cap
n/a n/a n/a n/a n/a 2% 2%
Lifetime Cap
n/a n/a n/a n/a n/a 6% 6%
Points (in percent) 0 2.125% 3.125% 0 3.375% 0 2%
Points (in dollars) 0 2,125 3,125 0 3,375 0 2,000
Closing Costs 2,500 2,500 2,500 2,500 2,500 2,500 2,500
Comparative Amount 102,500 104,625 105,625 102,500 105,875 102,500 104,500
Monthly Comparisons 834 823 812 1032 1035 708 643
Total Cost:
5 Years







15 Years
231,739 230,508 228,664 185,762 186,273 271,224 257,740%
30 Years
300,221 296,304 292,373     387,307 361,347

Notes: All calculations were made with The Banker's Secret Software, but can be done with other real estate programs. Lenders should be willing to give you figures based on the full term of the loan, as well as on the number of years you plan to keep the house. Your Work Sheet should only be used to help you pick a loan. Once you've gotten approval, you need a schedule that is based on the actual amount you borrow and the actual monthly payment, not the comparative figures that build in points and closing costs.

The Pocket Change Investor
The Secrets to Getting Ahead -- Even If You Have a Pile of Credit Card Bills, Hefty Mortgage Payments,
Loans Out on a Clunker or Two, & a Bad Case of the "I'm Tired of Living Payday to Payday" Blues.

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Reprinted from The Pocket Change Investor © 1991, Marc Eisenson & Nancy Castleman

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