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Welcome to the online presentation, "How to Save Money On Your Mortgage." This program will discuss ways that you can reduce the cost of borrowing money to finance a home. You'll also be introduced to important home financing terms such as points and private mortgage insurance.
Why a Class on Home Mortgages?--Why a presentation on home mortgages? Because mortgage payments are often a family's largest monthly expense. The total cost of interest can be 2 to 4 times the amount originally borrowed. Also, when interest rates are low and heading downward, low-cost financing strategies are especially attractive.
Class Objectives--In this presentation we'll discuss the benefits and process of refinancing, principal prepayment, and other strategies to reduce mortgage costs.
Refinancing: New Rules--First, let's talk about refinancing. Years ago, a common rule of thumb was that you didn't refinance unless mortgage interest rates decreased by 2% or more and you planned to stay in your home for at least 2 years. Today, even a ½% or 3/4% reduction in interest can pay for itself in a matter of months. Many lenders charge low up-front fees so there aren't as many expenses to recoup.
How to "Do The Math"--Here's how to calculate whether it pays to refinance your current mortgage. Add up the cost of refinancing. Then, subtract the new monthly payment from your current monthly payment and multiply it by your tax rate. Finally, divide the after-tax savings into the total cost of refinancing to determine the number of months needed to break even.
Example--Here's an example of how to calculate the break-even period for a refinanced mortgage. Note that the sample mortgage costs $1,295 to refinance. The pre-tax savings is $103 and the after-tax savings - in the 28% tax bracket - is $75. The break-even period is the total cost of refinancing divided by the after-tax savings, in this case about a year and a half.
General Advice--The longer you keep your mortgage after the break-even point, the more money you will save. It also pays to shop around and compare available refinancing costs and interest rates. Also, if possible, refinance to a loan term less than or equal to the number of years remaining on your mortgage. In addition, review your tax withholding because you'll be paying less interest to deduct.
More General Advice--If you refinance with less than 20% equity, you'll need private mortgage which insures the lender against loss. If you pay points to refinance, they are deductible over the life of the loan, with the exception of home improvement expenses. If possible, invest the money saved on mortgage payments. One possible place to invest is a mutual fund automatic investment plan.
Good Reasons to Refinance--This slide shows some situations where refinancing is often recommended. For example, if you are paying an interest rate higher than market rates or if you have an adjustable rate mortgage or jumbo loan and want to lock in a lower rate. Some people also refinance to take out equity for debt repayment.
Advantage of Prepaying a New 30-Year Loan vs a 15-Year Loan--You may be considering the merits of a 15-year loan versus a 30-year loan. Thirty-year loans provide some "breathing room" in case of financial setbacks. You can always drop back to the 30-year amount, if needed. Otherwise, you can pre-pay principal so that the loan gets repaid in 15 to 20 years. Plan to set aside extra money regularly to do this.
Points or No Points?--Another decision you'll need to make is points versus no points. A point is 1% of the loan amount. For example, $1,000 on a $100,000 mortgage. Today, many lenders offer no-point loans. However, "there ain't no such thing as a free lunch," as the saying goes. Loans with no or low points generally charge higher interest rates.
Example--Here's an example. Assume a no-point, $100,000, loan costs $734 a month while a 2-point, $1,000 loan costs $706. The difference is $28 per month. To determine which mortgage is best for you, divide the monthly savings into the up-front cost of points. In this case, it makes sense to pay points if you plan to stay put at least 6 years.
Other Refinancing Tips--Here are some other refinancing tips. First, ask for a refinancing rate on title insurance, which can cost about half the amount of a new policy. Also ask about using your existing survey and appraisal. Finally, try to drop private mortgage insurance, when you refinance. To do this, you must have equity of 20% or more of the value of your home.
When Do Adjustable Rate Mortgages Make Sense?--Sometimes adjustable rate mortgages, or ARMs, make sense. This is particularly true when interest rates are expected to fall and when a homeowner expects to move within a couple of years.
Principal Pre-Payment--Another way to save money on your mortgage is to prepay principal. Even small principal prepayments add up. This slide shows how amounts of $25, $50, and $100 added to monthly payments on a 30 year, 7½, $100,000 mortgage can save tens of thousands of dollars over time.
How to Pre-Pay Principal--Principal prepayment can begin with your first mortgage payment or any time during the loan term. To do so, simply add the extra amount to your regular mortgage payment. You can send the amount of next month's principal or send in any extra amount - such as $50 - or make lump sum payments occasionally with windfalls, such as a tax refund.
Should You Pre-Pay Principal? It Depends Upon...--Should you prepay principal? It depends. This slide shows some factors to consider. For example, your other debts - such as credit card debt - and your access to employer tax-deferred retirement plans or other attractive investments.
When to Pre-Pay Principal--This slide shows some times when it may be advantageous to pre-pay principal. For example, if you have norther debts and have fully "maxed out" employer retirement plans. Other times to prepay principal are when your house has lost value and to pay off your mortgage by a certain future date, such as a child's freshman year of college.
When Not to Pre-Pay Principal--This slide shows times when it is not wise to prepay principal. For example, when you have substantial credit card debt or when you are not taking full advantage of retirement savings plans. In addition, if you have higher-yielding investment alternatives, they would be a better use of your extra cash than prepaying principal.
Example--When deciding whether or not to pre-pay principal, weigh the risks and rewards. For example, stocks might pay a higher return over time than the rate on your mortgage but they also entail greater risk and the chance of loss of principal.
Resources For Pre-Payment Decisions--This slide indicates some resources for principal pre-payment decisions. Web sites, for example, allow you to calculate whether or not this is a good strategy.
Pay off Private Mortgage Insurance (PMI)--Another money-saving strategy is to stop paying private mortgage insurance premiums when you qualify. According to a 1998 law, this is supposed to happen automatically with equity of 22% of original property value. Homeowners can also request PMI termination earlier if they can provide proof of home equity growth.
More About PMI--Mortgage insurance typically costs about a half of one percent of the loan amount per year. There are three ways to increase your home equity to 20% or higher: 1) home price appreciation, 2) payments and principal pre-payments, and 3) renovations that increase a home's value.
Still More About PMI--Borrowers' requests to terminate private mortgage insurance early are generally honored only with a blemish-free payment history and after at least two years of payments. Lenders are required to notify borrowers about their right to cancel PMI and how to request it.
Other Ways To Save On Mortgage Payments--Here are two more ways to save on mortgage payments. First, have payments deducted automatically from a bank savings or checking account. Many lenders provide a discount for automatic payments. A second money-saving strategy is to substitute a lower-cost home equity loan for a first mortgage when you are refinancing. The up-front costs and paperwork are often substantially less.
Final Thoughts--Finally, beware of some common mortgage traps, such as 125% home equity loans and loan packing, where credit life insurance and other costly items are added to the amount borrowed. It is also advisable to check your credit report before applying for a mortgage. This concludes our presentation about saving money on your mortgage. We hope that you have found it helpful.

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