When you set out to purchase a home you have several financial factors to consider. First, of course, is the price of the home. Next is your mortgage interest rate. Those two factors, together with taxes and insurance, will determine your monthly payment. After that you have to consider Homeowner Association Fees, the cost of repairs and maintenance, and even the cost of commuting.
Today mortgage interest rates are at historic lows, but unless you’ve purchased with your own cash, mortgage loan interest is still the heaviest cost of home ownership. On the other hand, it’s also a tax deduction, which has the potential of putting a few of those dollars back in your pocket.
With mortgage interest, you’re always in arrears…
Just like rent, your mortgage interest is paid monthly. Unlike rent, which is paid in advance, mortgage interest is always paid for the preceding month. Thus, when you look at your monthly statement, the balance due is not the payoff amount. You owe that much on principal plus interest for the previous month. Your monthly interest is calculated on the balance owed, which is why it decreases just a little each month as long as you make your payments on time.
For the first ten years of a thirty-year loan, the lion’s share of your payment will go to pay the past month’s interest. Very little will be applied to the principal. That’s why it’s so easy to “double up” on payments in the early years.
For example: You have a mortgage loan with a payment of approximately $900 per month. A portion of that payment, say $200, will go into escrow to pay your taxes and insurance. Depending upon your interest rate and the age of your loan, about $500 could go to interest, leaving just $200 to reduce your outstanding loan balance. Making a payment of $1,100 rather than $900 would effectively be making two payments rather than one, because that extra $200 would go toward reducing your loan balance.
Good credit scores will make you eligible to pay a lower rate of interest, which will lower your monthly payment (and perhaps make it easier to “double up” on those payments).
It’s always a good idea to check your credit scores before making a loan application. You can do so at no cost to you by visiting www.creditscorequick.com. If your scores are low, take steps to raise them before making application. Here at Homewood Mortgage, the Mike Clover Group, we’re always happy to consult with you and make recommendations for improving your scores.
Refinancing is a good idea, but only if…
If your credit scores and your financial position have improved since you purchased your current home, refinancing into a lower rate is a good idea if the difference is enough to justify the cost of an appraisal and loan fees – and if you plan to stay in the home long enough to benefit. It’s a poor idea if you plan to move within just a few months.
Refinancing doesn’t mean you get a “payment-free” month, even though it might look that way.
When you refinance, your new loan will pay off the principal balance owed plus unpaid interest up to the date of closing.
Whether you close on the 5th of a month or the 25th, you’ll pay interest for the entire month. Say you close on your new loan on May 15. Your lender will add interest from May 1 to May 15 into your loan and pay it off at closing. Interest from May 15 to May 31 will be added to your closing costs and show as prepaid interest on your closing statement.
You won’t be obligated to make a payment on June 1, so you’ll effectively miss one month of making a payment on the principal balance. You’ll pay interest for the month of June when you make your July 1 payment.
While we do provide borrowers with Loan Estimates and do explain the various costs in advance, closing statements can still be confusing to anyone who is not using them on a daily basis. So never be hesitant to ask questions.
We of the Mike Clover Group are always happy to take the time to explain each item and make sure you fully understand every aspect of your loan before you sign the closing documents.
Call us at 469.621.8484 or visit us at www.mikeclover.com.
18170 Dallas Parkway
Dallas, TX 75287