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D.K. Fynn asked:




Just a few days ago, someone asked, “How Can I Shorten The Years of My Mortgage?”

Indeed that is a good question, and I’ll try to explain. I won’t dive deep into all the details, but I’ll give you a quick response.

So Why Do Mortgages Last So Long In The First Place?

First, we need to address two areas: principal and interest, and how much is applied to each.

I’m sure you’re familiar with these, but let me re-establish something, so you know where I’m coming from: The most difficult problem we face in any loan is the principal balance-because the interest is charged on that balance.

Having said that, have you ever studied how your monthly payments are being allocated between principal and interest?

That is, what portion of your monthly payments go toward cutting down the principal, and how much goes toward the interest?

Though I don’t know your exact situation, I can wager that if you’re in the US, the overwhelming majority of each payment goes toward interest, NOT principal. Whether the interest rate is high or low, it’s the principal that causes the problem.

A few weeks ago, one of my friends was furious to learn that, of each payment she was making, only about $50 was going toward lowering the principal.

She was lucky, because she now has a chance to do something about it. Many Americans never realize how serious this is, because it robs us of our retirement. Banks front-load our loans, charging the majority of the interest at the beginning. The result is: we pay for our mortgages decades longer than we otherwise should.

You see, the fact that most of each of your payments go toward interest in the beginning, rather than principal, the bank is forcing you to make payments for a long, long time–much longer than you should.

Remember, we’ve established that the real problem is the principal, not the interest. Of course, interest is a factor, however, we must remember that the high principal is causing the higher interest allocation…

… and because the interest is calculated on the outstanding principal…

…so goes the seemingly endless cycle of unnecessary mortgage payments, because the principal doesn’t get reduced fast enough.

How To Shorten The Length Of Your Mortgage

So, regarding the question of how to shorten the number of years on your mortgage, a better question might be: “How do I apply more money toward lowering the principal?”

On thing’s for sure: your bank isn’t going to tell you any secrets, since their goal is maximize their profit on your loan.

It’s important that you find a way to make sure that a greater portion of your monthly payments apply toward your principal-not your interest. And there certainly are ways to do that!

Frank Bruno asked:




Think of it this way: A retail store buys its merchandise wholesale from a distributor. The store then marks up the merchandise, and sells it at retail to Mr. And Mrs. Consumer. It’s the same way with a mortgage broker. The broker establishes relationships with several wholesale lenders. These wholesale lenders have pricing that is below the rates you see published in the newspaper.

Mortgage brokers are some of the most creative people you will ever meet – they will come up with unbelievable ways to make money off you. Rarely, if ever, will they give you a no-cost loan. Brokers make their money in several ways: with front-end points, back-end points, and junk fees.

Front-end points are those that you see in advertising. They are often referred to as “discount points.” The selling point here is that when you pay more points up-front, you “buy down” your interest rate. In other words, the more points you pay, the lower your interest rate. There can be some advantages to paying points. If you are buying a home, for example, the points you pay are generally tax-deductible (consult your tax advisor).

If you are planning to stay in your home for a long time, or do not plan on refinancing, the savings you encounter in the interest rate will offset the points you pay over the life of the loan, saving you money in the long-term. However, these points also go directly into the mortgage broker’s pocket. He may have charged you a rate that you thought you “bought down,” when in reality you already had a good rate and paid points for nothing.

For example, you might have a mortgage for $150,000 at 7.5% with 2 points. Those 2 points equals $3,000 out of your pocket and into the broker’s. This is just for one loan. Multiply this by several loans per month, and you see why there are so many mortgage companies in the yellow pages.

Back-end points are fees paid to a mortgage broker from the wholesale lending institution. Usually, the higher the rate, the higher the back-end points. This is very tricky, because there are creative ways in which these fees are disguised in loan disclosures. Many mortgage brokers will hit you with a combination of both front and back-end points

Junk Fees are fees charged by brokers and/or lending institutions as an add-on to any standard fees you might pay. Usually, these fees are not tax-deductible. Junk fees can be placed under any of a number of guises on your settlement statement, including Processing Fees, Underwriting Fees, and Warehouse Fees.

Mortgage Banks

Mortgage Banks are like retail storefronts. Let’s take a shopping mall, for example. A shopping mall is an establishment filled with nothing but retail stores. The store that you go into would depend on your needs. If you need shoes, you would go to a shoe store, and so on. Each store has its own specialty.

The same is true with mortgage banks. Some specialize in dealing with borrowers with perfect credit. Some specialize in dealing with those with problem credit. Some deal with a combination of both, and so on.

Herein lies the problem with banks. You can go to one, but if you don’t fit into their criteria, you’re pretty much out of luck. If you are lucky enough to be approved by a bank, you pretty much have to live with the rate you are given. There is little, if any, room for negotiation.

Mortgage banks not to be confused with a depository institution where you would keep your checking account. Mortgage Banks do not take deposits.

Regardless of which you use, they will have roughly the same guidelines for comparable mortgage products. Always make sure that you are on top of your credit scores before approaching either a bank or a broker. By doing so, you can go into the application process knowing what they know. Brokers, especially, will treat you with a little more care when you know your own credit situation.