8 Secrets For Saving Thousands When Finding, Buying and Financing Your Next Home

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Secret #4: Save A Bundle When Financing.

Your ability to afford a home will be related to a number of items. They are:

1. The PRICE of the home.
2. Your DOWN PAYMENT on your home, and thus the amount financed.
3. The INTEREST RATE and POINTS of your loan – the amount a bank charges you for the money.
4. The TERM of your loan: 10 year, 15 year, 30 year.
5. The overall TYPE of your loan. Most common is fixed vs. variable rates, but there are hundreds of loan packages from which to choose.

And just in case you were looking for a specific “rule of thumb,” for financing your home, you should know that…

There Are NO General Rules Of Thumb About Financing Your Home.

Each case is different, and your personal financial circumstances will have an impact on how much home you can afford.

However, you MUST understand the relationship and impact interest rates, term of loan, points, and type of loan can have on your overall financial picture.

Let’s start with the “amount financed” first. Many people often pay cash or put 20% or more down as equity. The reasons they do this are:

"The bank required us to…"
"We’ve just always put down this amount…"
"We wanted a lower payment."

Problem is, these reasons could cost you thousands of dollars.

The answer for how much you can put down on your home is different for most people. However, I have learned over time that…

Many People Put Down More Cash On Their Home Than They Need To, And Could Have Received A Better Return On Investment Had They Invested The Money Instead Of Putting It Into Their Home

Here’s a simple and fast way to "ballpark" the actual annual return on investment you get from the money you put down on your home:

1. Take a look at the homes in your area. How much have they appreciated each year on average, over the past five years? For example, you might find that values have increased an average of 1.5% a year.
2. Now, take the total cost of your home, multiply that value times 1.5% (the average expected annual appreciation of your home). For example, a $150,000 home increasing value at 1.5% for the first year. Thus, the home will be worth $2,250 more a year from now.
3. Now, divide the amount of increase in your home ($2,250 in the example) by the total amount of Down Payment you put into the home. For example, if you put down 20% (or $30,000), then $2,250/$30,000 = 7.5%.

Now 7.5% sounds like a fair investment. But the question you need to ask is this: Can you make more than 7.5% elsewhere?

And did you notice something else here? Had you put down just $15,000, your return on your Down Payment would be 15%!

The moral of the story: Putting more money into your home may make your banker happy, because it lowers the risk of getting his money out if you default.

And it may make your overall payment a little lower…

But it may be a wiser decision to put less into your home, IF you can locate an alternate investment that will pay greater interest on your hard-earned equity.

Now, let’s shift gears a little and talk about the impact Term and Interest rate will have on your overall financial picture…

How INTEREST RATE and TERM can make or COST you THOUSANDS!

Mortgage lenders toss around interest rate numbers as if they didn’t matter.

They DO!

And to illustrate the impact interest rates can have on your overall financial picture, we’ve presented a sample table below showing the interest you pay over the term of a 30 year, $150,000 loan at 8%, 7% and 6%.

And here’s the clincher: Just ONE percentage point on a $150,000 loan can cost you almost $37,000 over the term of the loan! TWO percentage points will cost you over $72,000!!

banker might tell you his “slightly higher rate” is only a matter of $103 a month in payment. But YOU should know better! Take a look at the table below:

That’s money taken out of your pocket if you don’t look for good rates!

And if you think interest rate has an impact on your overall financial picture, take a look at what modifying the TERM of your loan can do.

Here’s another example of a $150,000 loan at 7% interest. But this time, we examine the total interest paid when you select a 30-year vs. a 15-year vs. a 10-year amortization:

The "bottom line?" Estimate the maximum amount of payment you can afford, and adjust TERM and INTEREST RATE of your loan to minimize the amount of total interest you’ll pay.

But then your banker cuts in and says, "but the interest you pay is Tax Deductible…" And you should know this: If you’re in the 28% tax bracket, for every dollar in interest you pay, you only save 28 cents. Don’t go spending a dollar to save 28 cents if you can help it!

Here’s How To Instantly Know How Many Points You Should Pay…

Another consideration in the formula is the amount of POINTS your lender will charge you to initiate your loan. And what you’ll notice is there’s a GAME being played with you.

And if you don’t know the rules of the game, YOU LOSE!

Sitting across from a banker while he throws obscure numbers at you like you’re a human dartboard can be pretty overwhelming. And frequently you’ll hear terms like "7.5% with 1.5 points" or "7.25 with 1 point".

All-the-while you’re thinking to yourself, “I have no idea what the financial impact of this guy’s blabbering means to me.” And quite frankly, your banker knows…

The Less You Know About What You’re Paying The Better For HIM!

So hopefully this little "ballpark" example will help you quickly determine the best points-to-interest rate for you. How many points should you pay, and what formula is best for you? Here’s a little help…

If a banker is giving you several options of interest rates and points, you need to sort out the financial consequences so you don’t lose money. Say, for example, you were considering two loans. Both are for $150,000, and both are 30-year amortization.

DEAL #1: One loan he offers you is 7.5% with 0 points for origination…
DEAL #2: Another loan he offers you is 7%, but he wants two points to originate the loan.

What’s the ONE factor that will determine which loan is better?

How LONG You Keep The Loan!

The first thing you need to think about is how long you’re going to live in that home. The average homeowner spends about 5.5 years in their home before selling for whatever reason.

So, for example sake, let’s say you plan to live in the home five years. Here’s how you determine which deal is better:

1. Take the difference in monthly payments (principal and interest only) of EACH loan.
2. Multiply that amount by 12 months to get the annual amount of difference.
3. DIVIDE that amount into the $$ amount of points you pay to determine the number of years at which you recover the points paid up front. If the number of years is LESS than your anticipated time in your home, you’ll be better off paying the points and getting the lower rate. If it’s higher than you plan to spend in the home, opt for the lower points.

Here’s an Example…

1. The difference in monthly payments is $51 a month ($1049 - $998 = $51).
2. $51 X 12 months is a savings on (approximate) interest of $612 per year.
3. Total Cost Of Points divided by $612 is 6.13 years ($3,750/$612 = 6.13).

The result? If you stay in your home for five years, you will NOT recoup the points you paid up front with the savings in a lower interest rate. Recoup time is about six years and two months to breakeven.

So your best bet would be to select loan #1.

If, however, you planned to keep your home beyond six years and two months, you’d be better off with loan #2 (i.e. the overall savings in interest rate will exceed the amount you paid in points – not considering the time value of money).

Are you starting to see how important it is to understand your home’s financing? How important it is to shop for the best rates, terms, and points?

Good! Now, let’s move on to another important secret for buying your home…