Did you know that your knowledge
about home financing can mean the difference between making
and LOSING tens of thousands of dollars?
If you’re like most people, home
financing…with all it’s hidden costs and games…can be a
daunting and confusing event. And for about 80% of people out
there, borrowing $100,000…$200,000…or even $500,000 or
more is the largest financial transaction you will incur in
your life.
Small mistakes can leverage
themselves into HUGE losses of money. That’s why you need to
be armed to the teeth, not only with helpful knowledge, but
with proven, helpful strategies and questions that will get
you the very best mortgage for your situation for the
absolutes lowest cost available in the market.
And that’s why I created this
report…to give you a number of helpful, straightforward tips
for avoiding costly mistakes and getting the very best
financing for your dollar.
Here are 7 strategies (I call them
"secrets" because so many home buyers disregard them
when buying a home) you should consider when financing your
home…
Secret #1: Clearly Understand How
Much Financing You Can Afford
Like it or not, there are 2
guidelines bankers and mortgage lenders use to determine how
much loan you can afford.
The first guideline is the Payment To Income Ratio.
This guideline compares your income – or your total
household income – to the amount of mortgage payment you’re
considering.
To calculate the "payment"
part of the formula, the lender will take the mortgage payment
(principal + interest) and add to it Property Taxes and
Insurance. Hence the term "PITI" (principal,
interest, taxes, and insurance).
Usually lenders will loan up to 28%
of your total household income.
But before you think you’re home
free, there’s something else you need to know…
It’s called the Debt To Income Ratio.
Debt refers to ALL the major monthly payments other than your
mortgage payment (PITI). To arrive at this amount, the lender
will consider…
Your car payment…
Your credit card debt and payments…
Any IRS liens or payments due…
Any other payments and debts you have
(boat, 2^{nd}
home, etc.)
Then, they’ll compare your total
debt to your ability to make current payments with your new
home loan added into the equation.
Now, here’s the
"stickler." Each mortgage company sets different
limits on your Debt To Income
ratio. Which is why it’s critically important to find a
MOTIVATED LENDER.
Don’t follow the "canned"
financial advice like you see on TV. Most of that advice is
"rule of thumb," and designed for the lowest credit
rating and highest interest rates.
Think about this…
If you spend 2 or 3 days to find a
loan that saves you $40,000 to $150,000 over it’s term, your
time is WELL WORTH SPENT! Doing a little homework on your own
will literally save you thousands over the term of your loan.
Secret #2: Be Financially Prepared
– Ahead of Time!
Many people go about the home
finding process backwards. They go through the entire process
of searching, evaluating, and writing an offer on their home,
WITHOUT being financially prepared.
And it usually costs them money. Big
money!
Doing a few things up front, BEFORE
you go searching, will save you a lot of money, time, and
hassles. What are those things?
Here are 3 of them.
First, find a MOTIVATED lender. No,
don’t just go down to your local bank where you’ll likely
to be slowly tortured by some bureaucratic "vice
president" who makes his bonuses and gets promoted
according to how much paperwork he creates (at YOUR expense)
and how many DECLINES he produced.
You see, the only quota a banker has
to live by is:
"How many BAD loans did you originate?"
They don’t get measured by their
production…
They don’t get measured by their
service…
They only get measured by the
MISTAKES THEY AVOID!
Now, I know if your local banker sees
this, he’s going to blow a cork, and start reciting all the
ad campaign jargon most banks are spouting these days. But the
truth is…
There Is Absolutely NO
Incentive For A Traditional Banker To
Serve Your Interests
In Any Way
What you want to do is find a
mortgage lender who is MOTIVATED to take your loan. One who
represents many different products, and can offer you many
options for making your loan most affordable.
Here’s an important tip: Ask
your REALTOR^{®}
to refer one or two lenders to you. Why? Because Realtors have
power over lenders, because they send lots of clients. It’s
not just YOU alone talking to them.
If they don’t give you first class
service, the Realtor who sent you will refer (ALL) their
clients to someone else. So they’re motivated to SERVE YOU.
And the minute you have a problem with your loan, you can turn
to your Realtor…who has much more influence and leverage
over the lender than you alone.
After all, your Realtor and lender
both want to see the transaction close. There’s power in
numbers and influence. Use it to your advantage.
Now, the second thing you want to do
is GET PREQUALIFIED with a lender. Better yet, try to get
PREAPPROVED.
Why?
Because the first question any home
seller will ask when an offer is presented is "Is your buyer approved for a
mortgage?"
And rightfully so! The seller doesn’t
want the deal to fall through because you couldn’t get
financing. When they accept your offer, their home comes OFF
the active market. If you fall through, it costs them time and
money.
Plus, there’s one more reason to
get prequalified or approved…
You Will Have Much
More Power To Negotiate
Price And Terms When
You’re Financially Qualified!
When you have money behind you, the
seller knows your serious. And a serious buyer ALWAYS has more
influence to negotiate. So do yourself a favor, GET
PREQUALIFIED or PREAPPROVED!
Now, the third way to become
financially prepared is to have deposit funds available
immediately. One way to do this is to write a check in the
amount of 3% of the highest price you’ve been qualified for
financing.
Make the check out to the Brokers
Trust Account, or the Title Agency you will use. The broker or
title company are trustworthy fiduciaries by law, and will
hold the check uncashed until you make an offer that’s
accepted.
Now I know what you’re thinking…
"It’ll be a cold day in Ecuador before I write a
check before
we’ve even located a home." I understand.
But you may want to consider this…
Jim and Susan were buyers from
outside their immediate area. Because of their distance, they
could only get together with their agent with 2 days notice.
And the market was pretty good.
Three homes came on the market, and
were sold before they could get together to visit them. Twice,
they lost other deals because of bidding wars.
Finally, out of frustration, they
placed an uncashed deposit with their broker.
When they finally found the right
home, they decided to write an offer…
And because they placed an uncashed
check on deposit, their agent could enter negotiations with
verbal authority to make the offer. And because the agent
could demonstrate that he had earnest funds, the buyers were
able to sign a faxed copy of the offer, and their deal was
secured.
And it’s a good thing! The very
next day, 3 more offers came in on the home they just put into
escrow!
Secret #3: Understand The Basics Of
Home Financing
Your ability to afford a
home will be related to a number of items. They are…
The PRICE of the home;
Your DOWN PAYMENT on your home, and
thus the amount financed;
The INTEREST RATE and POINTS of
your loan – the amount a bank charges you for the money;
The TERM of your loan: 10 year, 15
year, 30 year.
The overall TYPE of your loan: Most
common is fixed vs. variable rates. But there are hundreds
of loan packages to choose from.
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:
Take a look at the homes in
your area. How much have they appreciated, each year
on average, over the past 5 years? For example, you
might find that values have increased an average of 1.5%
a year.
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.
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 hardearned 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, I’ve
presented a 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!!
Your 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…
Loan Amount
$150,000
$150,000
$150,000

Interest
Rate
8%
7%
6%

Monthly Pmt.
$1,101
$998
$899

Interest
Paid
$246,233
$209,263
$173,757

Savings

$36,970
$72,476

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…
Term
30 Year
15 Year
10 Year

Interest
Rate
7%
7%
7%

Monthly Pmt.
$998
$1,348
$1,742

Interest
Paid
$209,280
$92,640
$59,040

Savings

$116,640
$150,240

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."
Allthewhile 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 pointstointerest
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 2 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 2 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 5 years. Here’s how you determine
which deal is better…
Take the difference in monthly
payments (principal and interest only) of EACH loan…
Multiply that amount by 12 months
to get the annual amount of difference…
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…
Loan
#1,
$150,000
#2,
$150,000

Points
0
2.5

$$ Points
$0
$3,750

Interest
Rate
7.5%
7.0%

Mo. Payment
$1,049
$998

The difference in monthly payments
is $51 a month ($1049  $998 = $51).
$51 X 12 months is a savings on
(approximate) interest of $612 per year.
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 5 years, you will NOT
recoup the points you paid up front with the savings in a
lower interest rate. Recoup time is about 6 years and 2 months
to breakeven.
So your best bet would be to select
loan #1.
If, however, you planned to keep your
home beyond 6 years and 2 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?