Three Strategies to Get Control of Your Mortgage
A mortgage has 3 items that are directly under your control.
Modifying any of these items:
Changes your Rate
Changes the amount of Interest you Pay
Changes the duration of the Mortgage
The three items that are under your control and you can change are:
Increasing or Decreasing your Loan Balance - they refer to this as Loan to Value or LTV for Short.
Increasing or Decreasing your Mortgage Term - you can change the length of your mortgage to 15 years, 30 or 40 years.
Buying Down your Rate
Example #1 - Decreasing your Loan Balance:
Most people are familiar with Refinancing which increases the loan balance. The reason it does this is because you are including the costs of the refinance into the new loan amount.
For example, if your loan balance is $800,000 and the costs of refinancing are, say, $20,000, the new loan amount would be $820,000. Even though your mortgage payment decreases on a monthly basis, your loan balance increases by the amount of the closing costs.
When you refinance and the difference in rate is 1% less of what you currently have or more, you usually recoup the cost of refinancing within 1 to 2 years.
However there is another alternative to Increasing the Loan Amount and that is to Decrease the loan amount.
Take the following example:
Notice that the loan to value is 75.77%, this means that your loan amount is equivalent to 75.77% of the value of the home.
Lenders use Loan to Value, or LTV for short, to price their loans.
If your loan balance comes down to 75%, the rate decreases!
In this case, 75% of $1,300,000 is $975,000 which is $10,000 less than $985,000.
In this case, when you refinance you could ALSO pay down the loan by $10,000 and get: a much lower rate since now you move to the 75% band, lower loan balance and lower payment.
My sophisticated Financial Advisor clients do this and I learned from them.
Your new mortgage might look like this:
Example #2 - Decreasing or Increasing your Mortgage Terms:
Last week I covered what happens when you Decrease your Mortgage Term, I gave the example of changing your mortgage term from 30 years to 15 years and basically you could save up to 75% of the total amount of interest over the life of the loan.
The disadvantage of the 15 year mortgage is that your payment goes up, however if you have the cash flow, it remains a powerful tool to save most of the interest.
What happens when you INCREASE the term?
Let's continue to use the same example to make it simple.
On the first graph of this email you have the typical mortgage at 30 years, now we are going to change it to a 40 year mortgage:
Notice that the payment goes down substantially!
But doesn't the amount of interest increase?
How is this useful ?
It is a matter of cash-flow and goals.
Most business owners work on a cash flow basis, the reason they do this is because cash-flow is constantly changing, going up and down.
Business owners need to minimize fixed costs and expenses and every so often get a windfall.
By using a 40 year mortgage, you change your payment to a virtually Interest Only Payment since Interest Only and 40 year Payments are almost identical.
But, a 40 year mortgage costs much less than an Interest Only and it gives the business owner the flexibility of having a low fixed cost and whenever he or she experiences a windfall, he can always amortize the mortgage.
This gives you options!
Same as with Buying Down the Rate:
Buying Down the Rate means that you advance the Mortgage Banker some cash now as prepaid interest so the Mortgage Banker would in turn give you a lower rate.
Most Mortgage Shops do not give you the option to truly buy down the rate because on a "No-Points" mortgage you are paying for the broker's commission, you are not buying down the rate.
This might sound confusing because the Mortgage Broker is giving you a lower rate in Exchange for "Points", so how come you are NOT getting a lower rate?
This is what happens behind the scenes:
The Mortgage Banker is offering say, a rate of 6.5% PAR, this means, this is the Mortgage Banker's "price" of the mortgage to you, the Borrower.
However, the Mortgage Broker elects to get paid by the Banker (he does not tell you this) so the Mortgage Banker quotes you a rate of, say, 7.5% and offers you the ability to "Buy it Down" to get a lower rate.
Even if you buy it down, you are not getting the 6.5%.
The reason is that the Banker has to increase the rate in order to pay the Mortgage Broker.
If you elect to pay the Mortgage Broker directly at the Close of Escrow when the loan funds, you are at 6.5% and you can truly Buy it Down BELOW 6.5%.
In that case YOU pay the Mortgage Broker and he works for YOU!
These 3 factors mentioned, to recap:
Loan to Value
Term of the Loan
Buying Down the Rate
are under your control REGARDLESS of what happens in the Economy.
Or course, everyone is different, each case is unique and the numbers I gave you above are for illustration purposes only to give you an idea as to how this works.
Reach out to me and I will analyze your unique situation and see if any of the above strategies could benefit you.
