Let me give you four simple examples of
popular folklore, things most people believe.
- The best loan is the most popular one, a 30 year fixed rate mortgage.
- If you can find a lender offering a no-point or no-cost loan, it's a good deal.
- When refinancing, the objective is to lower your payment.
- It's important to check a number of lenders so as to get the lowest cost.
My guess is that about 80% of people buy
into those statements. However, each one of those results in increasing the lending
industry's profits. More to the point, they all INCREASE YOUR COSTS, exactly the
opposite of what you want. You want to DECREASE YOUR COSTS.
I know you are sceptical so let's examine
these in more detail:
Most people are in their homes for only 8 or
10 years. They do not need to pay the extra 1/2% cost ($1,000 ever year on a $200,000
loan) for 30 years of rate protection. By the time they get in their last home, one where
they are likely to pay off the mortgage, they can probably handle a 15 year loan, which
enables them to own their home even faster.
No point and no cost loans are insanely
profitable to lenders, not what you want. They may say "we raise the interest
rates slightly," but they are willing to subsidize your loan because they
get a lot more interest, not slightly more. How much, if you pay $1,000 towards
up-front costs, you'll save about $3,000 in interest. Pay $2,000, you'll get back
$6,000. This is a great deal for you.
Again, 99% of people get this wrong.
The great benefit of a refinance is to lower the total amount of interest you pay, not
just the monthly payment. If you are more than 5 years into your current loan, even
if you lower your interest rate 1%, if you select another 30 year loan, you actually may
owe MORE TOTAL INTEREST than you owed on the old loan with only 25 years left.
Here's another myth. There certainly
are some scumbag lenders who try to bleed every customer they find and you want to avoid
them. Most of the larger lenders do not do this. FACT - among the ethical lenders
there is almost no difference in costs, maybe $100 or so plus or minus from the average.
Up-front costs only about 1% of the total amount you will pay over the time you own
your home anyway, so what's the big deal? What you want to be concerned about it the
other 99%, the interest rate! If you accept that all loans cost about the same,
you can concentrate on what's important, what loan program you buy for that cost.
I hope these little revelations about our
business convince you that there is some merit in getting an education about the process.
Start by buying my book . It's a bargain.