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Four mortgage secrets only mortgage lenders know

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(Read caption) A sold sign hangs in front of a home in the northwest area of Portland, Oregon, Mar. 20, 2014. Saving costs on a mortgage can help you afford the house you want.

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Taking out a mortgage loan to buy a home is a huge investment — probably the biggest you'll ever make. That's why it's important to cut as many costs of applying for a mortgage loan as possible. Who knows best how to reduce these costs? Mortgage lenders, of course.

Here are four secrets that your lender should be sharing with you. Knowing these tips can save you big money.

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1. Close Your Loan at the End of the Month

It doesn't matter whether you close your mortgage loan on the fifth day of the month or the 28th, right? Wrong.

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Rakesh Gupta, director of ARG Finance, says that borrowers who close near the end of the month will reduce the amount of prepaid interest they need to pay with their first mortgage payment. This one simple strategy could save you hundreds of dollars.

"There is complete liberty from the lender's end in letting you choose the day of the month on which you wish to close," Gupta said. "But does he tell you that? He doesn't. He asserts you to close as soon as possible."

Here's an example: If you close on November 5 and your first mortgage payment is due after January 1, your first payment will, of course, include the interest that accrued in December. But it will also include the interest accrued in November. If you close November 5, that's 26 days of interest.

But if you close on November 27, you will only pay three days of interest for that month. If your interest comes out to $25 a day, closing on November 5 will cost you $650 in November interest on your first payment. If you close on November 27, it will cost you just $75.

2. No One Really Knows Where Interest Rates Are Heading

Your mortgage lender should be studying the market, and should have a rough idea of whether mortgage interest rates will be going up or down in the near future. But even the savviest lender can't tell you exactly what interest rates will do in the next week or month. No one can.

That's why Nicholas Kensington with Scottsdale Real Estate says that if your lender quotes you a rate that you think is a good one, you should pay to lock it in place.

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"Rates will end up fluctuating constantly," Kensington said. "If you're out there getting quotes, that doesn't mean you're out there getting locked-in rates until you ask them to lock that rate. Don't make the assumption that anything is locked in until it's in writing."

If you lock your interest rate, it will remain in place even if rates rise — or, on the downside, if they fall — after your lock. Make sure you know how long your lender is locking in your rate. It might be for 30 days, or it might be for 60. Make sure to get the specifics in writing.

3. No-Cost, No-Point Loans Don't Really Exist

You might hear lenders advertise no-cost, no-point mortgage loans. But Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, says that there really is no such thing as a no-cost mortgage loan. Instead, most lenders who advertise such loans will roll the costs of originating their mortgages into your interest rate. They'll charge you a higher rate for the "no-cost" loan, Fleming said.

To avoid falling for this trick, make sure you know how much you are paying for your loan, even if lenders advertise it as a no-cost one.

"Ask for the total cost of financing over the holding period of your loan for several options, including rolling the costs into the interest rate versus no points versus paying points, and choose the lowest cost," Fleming said.

4. Refinancing Doesn't Always Make Sense — Even If Your Payment Falls

Fleming says that too many homeowners automatically decide to refinance if the drop in their monthly mortgage payment allows them to pay back the costs of their refinance in a short period of time, say three years or less.

This is not always a sound financial strategy, and too many lenders ignore this fact, Fleming said.

If you save $225 a month on your mortgage payment after refinancing, it might take you just two-and-a-half years to pay back the closing costs. But this payback analysis ignores the increase in your loan's term and the restarting of the amortization cycle, Fleming said.

Say you've paid off 14 years on your 30-year fixed-rate loan. If you refinance to another 30-year loan, even one with a far lower interest rate, you might pay more over time because you are, essentially, replacing a mortgage that has 16 years to pay off with one that would require 30.

At the same time, the amortization process starts over. When you first start paying off a home loan, the majority of your payment goes toward paying off interest. By the time you're on year 14 of your 30-year loan, more of your payment will go toward paying down your mortgage's principal balance, instead. If you refinance that 30-year loan, most of your payments again will go toward interest.

"Look at the total cost of financing over your anticipated holding period for both your existing loan and the proposed loan, including costs, and choose the lower," Fleming said.

This article first appeared at Wise Bread. 


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