Mortgage Secret #1 – The interest rate is not as important as the total interest you pay (Part 1)

Why is this true?  Check my post, “How much interest do you really pay?”

Even at a 4% interest rate, if we make the regular payments we will pay an extra 72% in interest over 30 years.  That’s like a 72% interest rate, not 4%!

Yet what is the first question most people ask when shopping for mortgage financing?  They want to know what the interest rate will be.  Why do they want the lowest rate?  They want the lowest cost.  They think that by finding the lowest rate, that they will automatically get the lowest cost.  Also, they have been trained by the media and most mortgage advertisers to believe that the interest rate is all that matters in choosing mortgage financing.

So they will call around to everyone in town, nitpicking on the rate, thinking that if they can save one-eighth of a percent at one place instead of another, that they have found the best financing for them.

But let’s think about this for a moment.  Let’s say that we were going to call everyone in town, nitpicking on the rate, thinking that is the most important (or only) factor to consider in getting a loan.  And let’s say that we do it very well and that we actually save a whole one-half percent on the interest rate.  However, we still pay that loan back over thirty years as the lender wants us to.  Do you realize that we will only save about $10,000 in interest?  For example, on a $100,000 loan at 4%, we were paying $72,000 in interest, now it will cost us $62,000 in interest!  A savings of $10,000 helps, but it’s not a huge savings when we put it in perspective.

On the other hand, let’s say that instead of focusing on the interest rate, we focus on paying that mortgage off in 7 years instead of 30, as I teach my mortgage customers to do.  Now our interest cost will only be around $15,000 in interest!  Which would we rather pay, $15,000 or $62,000?

This is a significant savings – but it’s only possible if we focus on the right thing instead of trying to do what most people do.

In the continuation of this series on the Three Mortgage Secrets, I’ll share more about Mortgage Secret #1 and why it is so important to understand.

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