How Do I Know I'm Getting A “Good Deal” From the Mortgage Guy?
Updated: Jun 24, 2020
Mortgage advertising steers you to rate and payment, rate and payment. So, what do you look at when getting a mortgage? That's right, rate and payment.
What many people do not realize is every mortgage is structured the exact same way. You have the price that you're going to pay. And you've got the interest rate, and it goes on a sliding scale. The higher you want to pay in costs the lower the rate you're going to get. But you've got to look at it this way. It's like playing a game of poker.
Imagine that you have six thousand dollars’ worth of chips sitting on the table and you've got this choice: you can play “all in” on that $6,000.00, if you do you lose it all on the very first hand. Those are the hard costs that you just paid. But in return you're going to win $100 for every hand that you play. You can play as long as you want, 30 years in fact, but you can only pay to play one hand per month. So, the question becomes how long is it going to take you to win your six-grand back? Well it's easy math. One hundred bucks a hand. It's going to be 60 hands, 60 hands divided by 12 months means it's going to be five years. It's going to take you five years to win back that's $6,000.00 you paid in hard costs.
Now option number two is you can say well I'll keep my $6,000.00 here with you on the table and you will “lose” $100 every hand. That way if you do leave the table before 5 years you come out ahead. In this case you take a higher interest rate.
You don't pay any closing costs at all. But the net result is your monthly payment is one hundred dollars higher. And the reason you do that is because you aren’t sure you how long you want to sit at this table. Do you want to sit here for five years just to win your money back? Fannie Mae was founded in 1938. Freddie Mac in 1970. They've been tracking this and the average lifespan of a mortgage, most them 30 year fixed, is about 4.2 years. It's easy to figure out what your average is. You just look at how many homes have you owned and how many mortgages you've had in each house.
If you bought a house you lived in for eight years you refinanced once for example, that's two loans in eight years, you're at four years. Then you bought another house you lived in for 10 years. You got three loans now in 18 years, but you refinanced that home once as well. Doing the math, 4.5 years. The average is about 4.2 years.
Going back to this poker game. If you didn't go all in with the six-grand and you kept this mortgage for the average of 4.2 years, that means you played about 50 hands before you got up and left the table, which means you still took $1,000.00 of chips with you because you didn’t play the game long enough to either spend that money or to win it back. Makes sense?
Think of the car dealership advertising “0% financing OR $4,000 off the price of the car.” Do you know what the $4,000 is? It’s the cost of financing!
That's how all loans work. There is a break-even point. There always is. Better questions to as are the ones of yourself. Cash-flow and equity objective questions like “What are your long-term plans for the house?” Don’t get fooled into chasing a low rate at a cost. Often the lowest interest rate is not in your “best interest.”
~ Article by Todd Gehrke.
Todd Gehrke is a published author, public speaker & a Sr. Loan Officer with New American Funding in Greenwood Village. He can be reached at firstname.lastname@example.org or (720) 608-0013.