MORTGAGE REDUCTION PLANS
SOME WAYS TO SAVE A LOT ON YOUR MORTGAGE
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  • Besides assisting you in the job of buying and selling real estate, I also can help you save a bundle of cash on your on-going mortgage payments! How much? That's really up to you! But, potentially, A LOT!
  • There are basically 3 ways to go about this, and you can probably make use of at least one - and maybe some combination of all three! I will show you how all three work in the following pages. But first, let me explain why you should care about any of this, and why I - as a Realtor - should be telling you about it. 
  • First, this (saving money on your mortgage) will benefit you from an investment standpoint. Let's say the rate of interest you are paying on your mortgage is 7.0%. Do you know of a bank savings plan or a C.D. that's available that's paying 7.0%? No! Maybe 3-4%, if you're lucky. So, if you can save 7% on some of your money, isn't that equal to making 7% on that same money? Well?
  • Second, this will benefit you by increasing your equity. This will help you in your old age when you need more money and are too feeble to earn as much by working. This will also benefit you by giving you the satisfaction of knowing you deprived your lender of some of the money he thought he was going to make by renting you his money!
  • Thirdly, it will protect you in a "Down" market. That's right, real estate values can actually go DOWN, just like the stock market! When the real estate market goes down (bad!) you'll be glad you have paid much of your mortgage off ahead of schedule.
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Here is an example of how it could affect you: Let us say you purchased a home for $150,000, putting $15,000 down (your equity) and borrowing $135,000 (your mortgage debt) for 30 years at 7.0% per annum interest. Your monthly principal and interest payment would be $ 898.00. Then, a few years later, the real estate market in your area goes down. Prices drop. Buyers disappear. It goes down because of the law of supply and demand. Many things can cause demand to go down, and supply to go up, resulting in a lowering of prices. So, this happens, and now your $150,000 home is worth $135,000. It has gone down in value by $15,000. That's a drop of only 10% of it's original value. That, coincidentally, is the amount of your original equity in the home, your down payment. So, at this point, you have (at least "on paper") lost all of the cash you originally put into the deal! Since you have beeen making your payments right along though, your mortgage balance has gone down - somewhat. Now, instead of owing $135,000, you only owe $132,165! Do the math. Your "equity" is now $2,835 - instead of $15,000! (o.k., your equity only dropped by 80%!) Now, this wouldn't be so bad if everything else in your life went on as planned. But, let's say that at this same time you suddenly have the (not unusual) NEED to have to sell your home. Why? Well, there are several not uncommon reasons why people HAVE TO sell their homes. Job transfer, divorce, loss of your job, health reasons - to name the more common ones. These are not "optional" decisions, they are often "no choice" decisions. (Maybe you will be lucky.) But now, you find, the cost of selling you home - even if you sell it yourself, without the help of a Realtor (God forbid!) - EXCEEDS what you still owe on it! Of course, you could make up the difference out of your own pocket, or, if you can't (by now you're broke) you could just stop making payments and let the bank foreclose on it, and get out of it that way - minus your good credit, which by now stinks! Too bad.  If you had had an extra $15 or $20,000 in equity, you could have ridden out the storm, so to speak. You might still have taken a "loss", at least on paper, but you would have been able to sell and not ruin your credit - maybe even come away with enough money to start over again with enough money to make a small down payment on another house!
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The above scenario can happen (ask anyone who owned a home in Colorado between 1985 and 1995). Why do I, as a Realtor, care? Because what benefits you as a homeowner benefits me as a Realtor!  Figure it out.  How can I sell your house (in a Down market) if you have no equity? Also, how can I sell you a house in that same Down market if you are broke and/or your credit is shot?  Also, how many of your friends and relatives are you going to refer me to if I didn't at least try to "save your bacon" by advising you ahead of time about some of your options? Instead, I'm just another unemployed Realtor who got blind-sided by "bad economic conditions" and wishes for the "good old days". That's not where I want to be in the event of another DOWN MARKET!
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O.K. Enough with the horror stories. So, how can you achieve the savings and other benefits spoken of?
Here's How:
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Pros & Cons:
       Refinance your mortgage to a lower interest rate:
    Pros:
    Doing this only makes sense if the new, lower interest rate is low enough to justify the costs of refinancing, such that you will at least recoup the costs over the period of time you expect to keep the property. If this "breakeven period" - the time it will take for savings to equal costs - is, say 5 years, but you plan on moving in 3 years, then it's not a good idea. But, if you plan on moving in 7-10 years, then it is a good idea. For example, just lowering your interest rate by ½ of 1% on a $150,000 loan will save you $750/year. If it costs you $3,000 to do it (new appraisals, loan fees, closing costs), then it will take about 4 years (4 X $750 = $3,000) to "break even". After that, you are really saving $750/year.
    Cons:
    If you refinance, you may save money but you have now extended the term of the loan to a new 30 year period. So, you may be actually adding to the number of years to pay off the debt - unless you compensate for this added period in some way (which I will explain later.)
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       Eliminate Unnecessary PMI/MIP Premiums:
    Pros:
    There is this thing called PMI, which stands for Private Mortgage Insurance. There is also this thing called MIP, which stands for Mortgage Insurance Premium. They are essentially the same thing. MIP applies only to FHA loans. PMI applies to conventional loans. What both of these things are is a type of insurance which protects your lender against you defaulting on your loan payments. This kind of insurance is required on all FHA loans, and on most conventional loans of more than 80% of the value of the underlying property (where you are putting down less than 20% as a down payment). So, if you bought a house for $200,000 and made just a 5% down payment ($10,000), your lender is going to require that you pay some Private Mortgage Insurance premiums to cover him for his "risk" in loaning you a proportionately large loan (95%) in relation to the market value of the property. If you'd paid down $40,000 of your own hard earned money (20%) he wouldn't worry so much. He'd figure you'd be motivated enough to do whatever you had to do to make your mortgage payments to him and to protect your $40,000 investment - your 20% equity in the property; even selling it as a last resort! But, if all you've got is a lousy little 5% ($10,000) invested, why, you might give up on it if you fell behind - or not be able to sell it if it dropped in value by 5% - and thus have to  dump it back in the lender's lap! He would then have to hire someone and pay the costs of selling the property in order to get back his loan money, and it would probably result in a net loss to the lender. The PMI pays for any loss he might suffer in such a case. Just like auto insurance pays for collision damage, PMI pays for "dented" mortgages. The cost of this PMI just gets passed on to you, (naturally), by having it tacked onto your monthly house payment. If you look at your payment coupon, it will show it as one of the items making up your total payment. Now, here's what most people are not aware of: This monthly charge for PMI - while it is set up to last for the duration of your mortgage, (or, for loans made after 1998, until the loan balance reduces to 78% of the original purchase price - which could be 12 14 years) - can be eliminated, if YOU take the initiative to do it! Guess what? The lender is never going to prompt you to eliminate this insurance. Why should he? It's protecting him,  - and you are paying for it! The actual cost of this insurance is somewhere around .0078% per year of your original loan amount. On a $150,000 loan, for instance, that's $1,170/year, or $97.50/mo. on your payment! That money that you could save! Saving this $1,170/year can result automatically in an additional savings of $131,604, by shaving 11 years off of your loan! If you paid $975/ mo. on your $150,000 loan, it would pay off in exactly 30 years. But, if you paid  an additional $97.50/mo. (the amount of your PMI that you are saving), then your total payment would be $975 + $97.50 = $1,195.00/mo. This payment of $1,195.00/mo. would pay off your loan in about 19 years - instead of 30! So, you'd save 11 years worth of payments. That's $131,604. Do the math! Unfortunately, if you have an FHA loan, you can't do this. You can't eliminate the MIP (the equivalent of PMI) and still keep the same loan. You can, however, refinance your FHA loan to a conventional loan, and eliminate it that way! You might even receive a partial refund of the money that you paid "up front" for this MIP when you got the loan, that is if you pay it off during the first 7 years. After that, there is no refund. This refund could amount to a few hundred, or several thousand dollars, depending on the size of the loan, and how soon you are paying it off.  And, this refund, however much it might be, would help offset the cost of refinancing to a new conventional loan!
    (Note: these rules could change in the future, should FHA decide to change their rules. Who knows when that could be?)
    Cons:
    1)  It might cost you $ 300 or $400 for a new appraisal and some other miscellaneous administrative costs to eliminate your PMI.
    2)  It could be inconvenient.
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       Pay Your Mortgage Loan Off Way Ahead of Time:
Pros:
It's fantastic how much you can save by paying your mortgage loan off ahead of time! So, why don't more people do it? There are a couple of big reasons. One is that they are not aware that they can do this (that's not you, anymore!). The other is the discipline factor (people just HATE that word!) It's just too easy for people to procrastinate; to never quite get around to it, or to keep at it consistently.  Things come up, such as a sudden expense, that put a strain on the budget and make it easy to just back down on sending in those extra payments for a few months, until things get better. But, those few months stretch into a few years, etc., and the plan is forgotten.  Fortunately, there is a very easy - no cost - almost painless plan - that makes it easy for anybody to make a small, consistent, painless extra payment and actually cut their mortgage way down!  In fact, it's actually possible, by combining the PMI reduction plan with it, to cut your mortgage balance in half! (Even better, if you did all three - refinanced, lost your PMI or MIP, AND paid on a bi-monthly basis! - but that would be TOO good!) Let's talk about what paying your mortgage loan off ahead of time can  mean to you in real terms.  Every extra dollar that is paid on your loan is a dollar that is earning you 7% interest (or whatever your mortgage interest is ). Let me put it a few other ways, and then it may dawn on you - if it hasn't already - how important this concept is.
Example #1: If you borrow $100,000 at 7.0% interest on a 30 year loan, your monthly payment would be $665.00/mo. In 30 years, you will have paid back $665 X 360 (months) = $239,760.00.  You will have paid back the original $100,000 - plus $139,760.00 in interest!
Example #2: If you borrow $100,000 at 7.0% interest on a 30 year loan, your monthly payment would be $665.00/mo. - same as in the above example #1. But, instead of paying the minimum set payment of $665.00/mo., you pay one-half of that amount - $332.50 - every two weeks. In other words you split your existing monthly payment in half, and it gets paid on a bi-monthly basis, every 2 weeks, or equal to one full payment every twenty eight days. The magic of doing it this way is that it actually results in your making one full extra monthly payment every year! That is because there are 2 or 3 extra days in each month, and in a year they add up to an extra 30 days. The result is, your $100,000 loan now gets paid off in approximately 231/2 years, saving you about $51,850!! And you didn't have to do anything to your loan, as far as refinancing it, or even getting your lender's permission! (More on this later!)
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O.K. So, this all sounds wonderful, doesn't it? But how do I go about actually doing it?
Here's How:
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