Home Loan Guidance Topics

High-Level Overview of Home Loan Costs


Paying Lower Interest and Insurance over the Life of the Loan



The cheapest loan is no loan at all

Most of us are not in the financial position to be able to buy a home without getting some amount of home loan. For this reason, we discuss how to make the home loan as inexpensive as possible. There could be other reasons for getting a home loan even if you do have the purchase money, like tax advantages and other investment opportunities. The Equal Home Finance Bureau is focused not on investment schemes or ways to leverage your home's tax advantage. We're focused on helping you reduce the cost of your home loan itself.

You pay interest in exchange for using someone else's money (the lender's money)

A lender loans you money because they can charge you for it. That charge is called interest. The interest rate is an amount you will be charged annually (and usually pay monthly) based on the amount you have been loaned. Average interest rates over the last several years have usually ranged anywhere from 6% to 10%. For every $100,000 borrowed, homeowners have paid between $6,000 and $10,000 per year, and often even higher than that, just to have the benefit of using the money. On top of that interest charge, the borrower must also pay back the $100,000, the original amount of the loan, called the "principal."

How do lenders arrive at the interest rate? The lender could have easily taken their money and put it elsewhere to make a profit. Instead, they loaned it to you, but they also want to make sure they get their money back. So, the riskier your home loan profile, the higher the interest rate. If you reach certain risk levels, the lenders charge you mortgage insurance on top of the interest. It's that simple. Much of this guide targets how the lender judges the riskiness of your home loan. The more you reduce the substance and appearance of your loan's risk, the lower your interest rate and insurance will be.

Even small changes in interest rates can mean big differences in your cash savings

Interest rates are often provided in whole percentage points, half points, quarter points, or "eighths" like 7%, 7 1/2%, 7 1/4%, 7 1/8%. How big is the difference between something like 7 1/4% and 7%? On a $200,000 loan, you would pay almost $500 more per year for the first several years on the 7 1/4% loan than on the 7% loan. Some tactics have actually helped homebuyers reduce their interest rate and insurance combination not by small percentages, but by FULL PERCENTAGE POINTS, saving thousands and thousands of dollars per year.

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