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How To Get A Cheap Mortgage

Section 4 - Chapter 15

Saving Money On Money

A cheap mortgage loan isn't hard to find these days, but getting the cheapest loan is not an easy task. It isn't just about the interest rate. A loan with a lower interest rate can easily cost more if it has a big loan origination fee, points, and mortgage insurance. You have to look at all of these things and more when looking at a loan.

Interest rates matter. How much do they matter? It depends on the rates, of course, but also on how long you will be paying on the loan. Suppose, for example, you borrow $150,000 to buy your home, and you pay 7% interest on that 30 year mortgage instead of 6.5%. How much more will you pay in interest if you pay on the loan for the entire thirty years? Almost $18,000 more!

On the other hand, if you move and pay off the loan after only three years, you'll do better to watch for those other loan costs. In this scenario, paying two "points," or two percent of the $150,000 up front ($3,000) to buy that lower interest rate would cost you more than the interest charges that it saves you. Almost $1,000 more.

It would be nice if there was a simple formula for figuring which loan is the best deal for you. There really can't be, unfortunately, because it depends on so many unpredictable variables. An adjustable rate mortgage loan, for example, might save you a lot of money the first few years, until interest rates climb and you are suddenly paying four percent more than when you started.

Then there is the question of how long you will be paying on the loan. Few of us can consistently predict our future. Are you going to be in the house for ten years, two years or for life? You have to at least make your best guess when looking at loan products. Here are some of the other things you will need to guess at, and how they will affect your choice of loan.

Will you likely move in the next four or five years? In general, if you will only be there a short while, you will save more money by getting an adjustable rate loan with low or no fees. The typical adjustable rate mortgage starts at a significantly lower rate than a fixed-rate mortgage. If the adjustment is annual, and there is a reasonable cap on how much the interest rate can increase each year, it may be several years before you are paying as much as the fixed rate options, even if rates are rising rapidly.

A common rule of thumb is to go with the lowest interest rate no-fee adjustable rate loan that you can find if you expect to pay off the loan in four years or less. A more precise way to choose is to create a "most likely scenario," based on when you think you'll be moving, and where you think interest rates are headed - and then figure the total costs of various loans based on these assumptions. Remember that a cheap mortgage loan is one that is cheap for you, according to how you will use it.

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