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How Mortgages Work


Ways to Save Money

Here are few things to remember that can help you save money on your mortgage:

  • Negotiate -- The credit market is tight, but you can still negotiate for better rates or fee waivers (particularly document preparation fees or the lender's attorney fees). Everything other than the "real" costs of the loan -- appraisal, title fees, processing fee, private mortgage insurance, credit report fees and inspection fees -- is up for negotiation, especially if you have a good credit score.
  • Choose the right type of mortgage -- This can get tricky. It's true that a 30-year fixed-rate mortgage will result in the largest total mortgage payment over the life of the loan. But there's a reason that the 30-year fixed was the preferred mortgage for decades and decades: it is stable and secure. Before you sign up for an adjustable rate mortgage or hybrid fixed/adjustable plan like a 5/1 ARM, run the numbers carefully. Can you really afford the monthly payments when the rate resets in a year or five years. Factor in the possibility that you won't be making more money then than you are now. If the mortgage crisis has taught us anything, it's that a lower interest rate doesn't equal a better mortgage.
  • Make extra payments -- Extra payments go directly toward the loan's principal. This means that the actual principal of the loan is knocked down by that extra amount you pay, rather than having the bulk of your mortgage payments paying interest. In fact, you can reduce your mortgage by almost 10 years simply by making one additional mortgage payment each year. Try out this calculator to see how much money extra payments can save.
  • Biweekly payments - Just as making an extra payment will shorten the life of your loan, so will shifting your payment schedule to biweekly as opposed to monthly. What this schedule does is build in an extra payment each year without it "feeling" like an extra payment. Your mortgage payment can simply follow your paycheck schedule -- if you get paid every two weeks, that is. With biweekly payments, a 30-year fixed mortgage will be paid off in about 23-and-a-half years.
  • Avoid PMI - Try to put in at least the minimum 20 percent down payment so you can avoid paying private mortgage insurance. If you're already paying PMI, make sure you watch your equity and drop the PMI once you hit 20 percent.
  • Make sure paying points will save you money -- In some cases, paying points can save you money, but not always. Quicken has a points calculator that shows you how points will impact your interest rate and monthly payment. Make sure that what you pay will be recouped within the time you plan to spend in the home.

For more information on mortgages and related topics, please see the links on the next page.


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