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Home Buyer's Recession Survival Guide - Minimize The Interest Payable

Updated on May 26, 2009

A form of Seller Paid Closing Costs has been around from the earliest days of real estate sales. If a property required a little cosmetic work, or if maybe the bathroom plumbing needed a bit of fixing, the buyer might want to handle the work themselves and would rather have the cash than having the seller do the fixes. A credit to cover the fair value of the work would then be arranged and the closing could continue normally.

That was then, this is now. There is a new trend of Seller Paid Closing Costs which is becoming almost universal. Seller Paid Closing Costs has become a virtually obligatory phase in any negoatiation. Here are several reasons why Seller Paid Closing Costs is becoming so popular.

A Seller Paid Closing Costs represents a seller concession which has become a very co Mortgage on way to assist with the financing of the property. You can look at it as an additional manner to finance your closing costs. A seller can pitch in either a percentage of the total purchase price or a flat fee to be applied towards the closing costs that you are incurring. There are various restrictions depending on the type of mortgage that you are getting, but your Mortgage broker or Mortgage banker can certainly inform you of the fine print of your Mortgage contract. You can't turn an Seller Paid Closing Costs into cash in your pocket, but you can certainly apply it towards all the various and sundry costs of closing.

A Seller Paid Closing Costs can be used to buy down your particular interest rate. Many buyers have no idea that they can actually do this. Let's assume that you have negotiated a 2.5% Seller Paid Closing Costs to you at settlement. This sum can in some cases be applied to get your rate down, perhaps by half a point or more. That half a point might not seem like much, but check out this calculation:

Principal: $250,000
Interest Rate: 5.5%
Amortization Period: 30 years

Monthly Payment: $1,419.47
Avg Monthly Interest: $725.03
Total Int: $261,010
Total Payment: $511,010

But the same loan at 5%:
Monthly Payment: $1,342.05
Avg Monthly Interest: $647.61
Total Int: $233,139
Total Payment: $483,139

That's $77.42 less a month and you'll be saving $27,871 in interest alone! Considering that 2.5% of $250,000 is just over $6,000, that can represent a really great deal!

Let's assume that you are currently paying your mortgage twice a month. That's a really good thing since you're already saving a lot of money in interest over paying your mortgage monthly. But you can take one extra step that will take entire years off your term. It's easy, and the results are amazing.

Your current bimonthly payment equals 24 payments a year. However, there are 52 weeks in the year, since most months are three days longer than four weeks. If you switch that mortgage payment from twice a month to biweekly, you will now be paying 26 payments per year. That is a stretch that shouldn't hurt your budget too much, but depending on your interest rate, mortgage structure and other factors, you could drop a 30 year term to less than 27 years!

Let's take this example:

Principal: $200,000
Interest Rate: 6.5% Fixed
Frequency: 24 payments per year
Total Interest: $255,085.94
Amortization Period: 30 years

Principal: $200,000
Interest Rate: 6.5% Fixed
Frequency: 26 payments per year
Total Interest: $196,909.90
Amortization Period: Less than 27 years

Make sure that your Mortgage allows for such a repayment schedule as some do and some don't. It's well worthwhile investigating this possibility. After all, those extra three days in most months could really be significant if they can allow you to own your house free and clear more than five years early!

One of the best things you can do with a sudden windfall, whether small or large, is to apply it towards your mortgage. You can knock entire years off the back end of your loan by paying down the mortgage at various times during the term, with a surprisingly small amount of money!

Have you received an inheritance? Got a hefty tax return? Sold an old junker car to a collector for big money? A huge bonus at work? Got lucky with a scratch ticket? Whatever the source, the best thing you can do is to have one nice, restrained festive evening, and then take everything that's left and apply it towards your mortgage.

First of all you must make sure that your mortgage is "open" and allows such sporadic payments and not "closed" in which case you are locked into your payment schedule and that's all she (under)wrote. Some open mortgages allow you to pay any extra amount you want, whenever you want. Some others only have clearly defined "windows" when you can toss in extra money. These windows typically occur every couple of years or so and are very specifically restricted. One day late, and you're outta luck.

The argument that you are better off placing your windfall into a long term savings account is fallacious. You should not have any sizeable savings as long as you have a mortgage. There is no legitimate, government secured savings plan that can possibly compare with the equivalent amount of cash placed towards your mortgage. It is by far the most efficient use of your money.

The calculations on how large a payment on which date will save you how much in total interest payments can get very complicated and are best left up to your Mortgage professional. However, it is not unusual to have a $10,000 one time payment knock $50,000 off the total cost of the loan, and that is definitely worth considering!

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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