How To Save Tens of Thousands On Your Mortgage – Most Bankers Would Prefer That You Did Not Know This Legal Loophole
This is just the first of ten money saving Insider Strategies for Homebuyers.
After you’ve read all TEN (10) of these Real Estate Insider Strategies you will be well on your way to learning the strategies and techniques, used by wealthy real estate investors and insiders That save Tens of Thousands on any single home purchase.
Real Estate is an unparalleled vehicle to create wealth, despite market conditions. But, if done wrong, this same vehicle can wreck you financially.
With Real Estate, there are many different tools you can use to obtain your objectives. And, like any tool, with proper instruction, it can perform great – and, with experience, can even be mastered.
But, without learning how to properly utilize and apply the tool, it can cause great damage if misused.
These strategies have proven effective over many years, by wealthy “Insiders” of the Real Estate and Mortgage Industries …
Now, it’s your turn!
So, let’s move on to the first of TEN Insider Strategies I want to teach you. This first insider secret, alone, can absolutely save you tens of thousands of dollars!
Insider Secret #1:
How to Save Tens of Thousands on Your Overall Mortgage … the RIGHT way.
We’ll talk about several things here:
a.) Build your net worth and equity faster
b.) Pay off your home in half the time – the right way.
c.) A little known requirement in the law that bankers won’t advertise to you. (If not executed precisely, the mortgage company could ‘weasel’ you out of your savings.)
d.) Get the seller to happily pre-pay tens of thousands of your mortgage interest.
e.) Should you pay points to the lender to lower your interest rate and mortgage payment – or keep the higher rate and pre-pay your principal? (It’s a surprising answer!)
This is a mortgage strategy that will save tens of thousands of dollars on your overall mortgage. It will also build your net worth and your equity a lot quicker and, in fact, you’ll be able to pay off your home in half the time.
But, there’s only one right way to do this in my opinion. There are several ways to do it – but only one right way.
There is a little known mortgage requirement that most homeowners don’t understand and, of course, bankers don’t advertise this, but the bankers have to execute this strategy for you if you do it properly.
When you pay a mortgage payment – when you obtain a mortgage, let’s use the example of a $200,000.00 mortgage at 6.5% amortized over 30 years. Your monthly payment is made up of four different items:
What is PITI …
First, the Principal amount that you borrowed and pay back on the loan, and then there is the Interest on the loan. Then, separately from that, you have your annual real estate Taxes that you pay into a monthly escrow account.
And fourth, you have your annual hazard Insurance policy, which is also paid into that same monthly escrow account. Collectively this monthly payment is generally referred to as your monthly P.I.T.I. payment.
Now the P.I. – the first two parts – are by far the majority of the payment, the principal and the interest. In this particular monthly payment, they would be $1,264.14. That’s principal and interest combined.
So, your total payment may be $1,500.00 if you add the monthly Tax and the Insurance payment, but the majority of it is the Principal and Interest …
and it’s the P&I that we’re going to focus on saving money in this particular strategy.
Every month the payment amount is always the same. What is different within that $1264.14 is that the Principal and the Interest portion change every single month.
In the beginning, almost all of the payment is Interest. That’s what is known as a front-end loaded mortgage. It’s what is also known as the standard amortization schedule.
Over 30 years, you’re going to pay back a lot more than the original $200,000.00 that you borrowed. (And that’s an understatement.)
In our example, you are going to payback a total of $455,090.00. That’s $1264.14 per month x 360 months (30 years of payments) = $455,090.00.
That means you pay $255,090 in just interest alone, plus the original $200,000 you borrowed.
In the beginning of your mortgage, your first monthly payment is going to be about 85% pure mortgage interest. And that’s almost $1085.00 in just mortgage interest. And only about 15% of your first monthly payment goes toward the principal reduction of the original loan amount that you borrowed.
That means only about $180.00 of your monthly payment goes toward the principal. That’s it.
Congratulations, you only paid your loan down by $180.00!
Seems kind of self-defeating doesn’t it? The next month, your payment is still going to be about 85% pure interest and the principal portion of your mortgage, that gets paid down, is still around 15% of the monthly payment amount. However, the interest portion is going to go down a little bit.
Actually, to be more precise, it goes down by about one dollar. And the amount of your 2nd monthly mortgage payment that gets applied to principal reduction of your original $200,000.00 loan goes up by about one dollar.
Wow, we’re really making some progress now! In two months you have been able to pay your $200,000.00 mortgage down by about $360, yet you paid about $2,170 in pure interest. Ouch!
Now, in the 3rd payment of your amortization schedule, the principal portion is going to go up by about another $1.00, and the interest will have dropped by approximately a dollar again. This process slowly continues throughout your mortgage, but every month, the dollar amounts will slowly increase.
With a standard 30 year mortgage, your original loan amount of $200,000.00 won’t even be half way paid off (down to $100,000.00) until the 22nd year of the mortgage.
But here’s where our ‘Insider’ strategies get really powerful. You can actually pre-pay the principal portion, the smaller portion of that mortgage payment, by at least one month each and every month.
And if you do so properly, then the bank has to waive all the interest associated with that next payment.
In other words, if we are in the month of January – and your first payment (payment number one) is due at that time, on January 1st, you pay the total payment amount of $1,264.14. However, you’re also going to send in extra money on January 1st, for the principal portion of the next payment (payment #2 in the amortization schedule).
So, payment number two, which isn’t due until February 1st (a month away), has a small principal portion of around $180.00 … you simply send that amount of money, along with payment number ‘one’ on January 1st.
Now they can’t charge you the full interest amount. You didn’t keep that portion of borrowed money for the full term, so they can’t charge you the interest.
They have to waive the $1,080.00 in interest that is associated with that particular principal pre-payment amount on payment #2. That’s powerful! And is an enormous amount of money for you to keep.
Once you know the exact process to send the extra money for the principal pre-payment portion, at least a month ahead of time …
the bank has to waive the interest amount that’s associated with the number two payment because you prepaid the principal.
But you have to follow a very particular and exact process, so you remove all of your lender’s opportunities to ‘weasel’ you out of your opportunity to save all of this interest!
Now don’t get confused, when February 1 comes around, you have already paid payment number one. And you also prepaid payment number two, back on January first.
So both of those payment numbers are wiped out — but your mortgage agreement requires that you still have to make a normal payment every month.
You don’t get away from that. However, now you’re at February 1st, the payment you’re going to make is $1,264.14, just like it is every month. But that payment will actually be going toward payment number three in the amortization schedule. And now, you should also make another prepayment — of just principal like you did before.
You’ll be prepaying the principal portion of payment number four, even though you’re only on month number two.
So, if the principal amount for payment number four is pre-paid on February 1st, the lender has to waive all the interest associated with payment number four, which is around $1,080.00.
Now you’ve been in the house two months, yet you’ve eliminated four of the payments, without doubling up on the total payment amounts!
You have NOT had to pay the full amount that would have been owed.
And, in fact, you saved over $2,160.00 in interest alone already.
Are you shocked, yet?
Now let’s skip ahead to March 1st. Third month in the property, you have to make a $1,264.14 payment like always. However, that goes toward payment number five in the mortgage amortization schedule because you already wiped out the other four payments ahead of it.
And now you’re going to make a principal prepayment on March 1st (3rd month of living in your property) for payment number six.
On payment number six, you’re going to pre-pay its principal portion of a bit more than $180. Then the bank has to waive the approximately $1,080.00 in interest associated with payment #6 in the Amortization schedule.
But remember, you’re on March 1st, (3rd month in your property) and you’re already on payment number six … even though you’ve only lived in your home for three months!
Now if you extrapolate this out, obviously you can see that you’re twice as far ahead every, single month.
The result is that by the end of month 180 (15th year) you’re actually on payment number 360 (30th year). You’ve paid off your mortgage in half the time, or only 180 months. There are 360 payments for 360 months. (30 years = 360 payments).
Obviously, you saved a lot of money on the mortgage interest –
$113,361.00 in interest savings, to be exact. You paid off your
loan in 15 years, instead of 30. That’s HALF the time!
Now you’ve done all this, without doubling up on your monthly payments!
As a matter of fact, there is another huge benefit. Over that second 15 year period, you don’t have to worry about making any more mortgage payments to the bank.
That means you do NOT have payments at all for the next 15 years! So if you compare yourself to a neighbor, who bought the exact same house next to you for the exact same price, at the same time …then for years 16 – 30, that poor neighbor of yours has to pay $1,264.14 payments every month for 15 more years, while you’re using your money to do other things!
That comes to $227,545.20 in payments you don’t make in years 16-30.
That’s big money by anyone’s estimation!
It is important that you seek proper guidance on this from an expert (not your bank). There are very specific sets of instructions and some ‘insider’ techniques, which you need to use in order to effectively apply this strategy and to notify your lender every month of your objective.
CAUTION! This needs to be done in a very precise way in order to ensure the lender can’t ‘weasel’ out of their legal obligation to save you money on the mortgage interest.
There are countless stories of lenders who have taken the ‘extra’ money that is sent in by borrowers for extra principal payments, and then applied it to the escrow account, where there is no savings or principal pay-down.
There have also been several lenders that accept the mortgage principal pre-payments from their borrowers, but then apply it to principal at the end of the loan in year number 30, starting with the 360th payment. When they do this, they work backwards every time another principal pre-payment comes in from that same borrower.
The borrower sees the principal amount of their loan getting reduced, and they think the lender is applying the pre-payments properly, within the amortization schedule. However, they don’t realize that the lender applies the pre-payment to the last payment in the amortization schedule of the loan.
Therefore, there is NO interest savings associated with that payment, since the whole payment is pure principal at the end of the loan.
If you remember from a previous paragraph, all of the interest is front-end loaded at the beginning of a 30 year mortgage. So you would not get the benefit of the huge interest savings in this scenario.
I have another twist on this strategy that actually gets the seller in your home buying transaction to help you, with this mortgage principal prepayment.
This is really HOT, too!
But I must stop here, though, lest I write something as long as the next Great American Novel.
To conclude …
As you can see, with just this one strategy alone, you will, literally, save tens of thousands on your home purchase … and we have only just begun!
Be sure to check your email often, because in a few days, you’ll get your second ‘inside real estate’ secret.
In it, I’ll be talking about how you can save on your closing costs, when buying your new home.
For example, you’ll learn how to save $300 – $1,000 on your Title Insurance. (Different from your annual homeowners insurance.)
You will also learn how to save $200 – $600 on up-front costs, required by your lender for home/land survey certification.
Find the Best Deals and Save $25,000-$50,000 on Your Northern Virginia Home Purchase. Get My FREE Homebuyer Savings CD to find out How to use the “Insider Techniques” to get Huge Home Purchase Savings.
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Until next time,
Thierry Roche SFR, CDPE
Host of Talk Radio’s,
‘Inside Real Estate’