Although lowering your monthly mortgage payment is always attractive, don’t let a slightly lower mortgage rate fool you. If you’re not careful when thinking about a mortgage refinance, you could cost yourself more in expenses than what you save in monthly payments — and not even know it. (Even with so-called “no cost” mortgage loans.) Refinancing a home loan has more to it than appears on the surface. Be sure to consult with a mortgage professional before getting yourself into something you can’t reverse.

Mistake #1: Waiting for lower interest rates.

Mortgage rates are notoriously unpredictable. No one can speculate on mortgage rates with enough accuracy to win every time. If rates are attractive, consider refinancing. If you do it right, and rates go down again later, you can always refinance again. If trates go down substantially before you finalize the loan, you can always change mortgage brokers. If rates go up, you’ll be glad you locked that initial rate in!

Mistake #2: Not shopping around enough with local mortgage bankers/brokers.

E-loan, Lending Tree, and other online mortgage shopping sites are great, but be careful! They are national mortgage shopping sites. That might sound nice because you get mortgage lenders from across the nation competing for your business, but be careful – any lender other than a mortgage lender who is familiar with lending in your home-state will not be familiar with local practices, and that could cost you in many ways. It might not only cost you that lower interest rate, but depending on your other circumstances, it could actually cause you miss that window of opportunity.

Mistake #3: Not looking at the whole picture.

If you have been paying your mortgage for several years, the amount saved every month by refinancing might not save as much as you think. In fact, it usually costs far more than people think! In other words, if you are 10 years into your mortgage loan, refinancing your mortgage would make you start over on the repayment of that debt. Obviously, it might be great to save some money after refinancing your home loan, but once you refinance the loan you’ve been paying on for 10 years, you’ll be paying off that loan for an additional 10 years! That could really hurt. Sure, it may seem great that you’re lowering your $1200 monthly payment by $100, but when you factor in the extra 120 payments of $1100 that you’ll have after refinancing, you’ll find that your “$100 monthly savings” will actually cost an extra $108,000 over the life of the loan! ($1100 times 360 payments over 30 years is $108,000 more than $1200 times 240 months.)

Be sure to get a “good faith estimate” and “Truth in Lending statement” from your mortgage broker before jumping into a new loan that could cost thousands of dollars (if not hundreds of thousands) over the life of your new loan. Get your mortgage broker to explain not only what your monthly payment will be, but also what your new loan balance will be compared to your old loan, what the new interest rate is, and how many years you will be adding to your repayment schedule if you do refinance.

Refinancing both your first and second mortgages will result in one low monthly payment that could save you thousands in interest charges. By combining both mortgages, you qualify for lower rates than if you refinance separately. You can see a significant savings with your second mortgage refinance, which is often several points higher than your first mortgage rates. You will also save on application fees and other closing costs.

Strategies To Lower Your Mortgage Payment

You have a couple of options to lower your mortgage payment when refinancing. The first choice is to find a low rate mortgage. So even if you choose the same length for your loan, you will still see a savings in your monthly mortgage bill. Adjustable rate and interest only loans will give you the lowest payments, at least at the beginning of your home loan. But a fixed rate loan can also give you reasonable rates with security that they won’t rise in the future.

The other option is to extend your loan term, especially in the case of your second mortgage which usually is for five to ten years. By consolidating your loans to a thirty year loan, you lengthen your payment schedule for principal, so you have a smaller payment. However, your interest rate and charges will be higher than with a shorter term.

Getting The Best Loan

Once you determine the type of loan and terms you want, do your shopping for a good lender to save even more money. Lenders will vary in how much they charge for closing costs and interest rates. The APR will tell you how loans compare overall, both in terms of rates and closing costs.

But if you are planning to move or refinance again in the future, then be wary of paying high closing costs. Even if they secure you a lower rate, you will only see a savings if you keep the mortgage for several years.

Don’t base your lender decision based on posted loan rates. Ask for a personalized loan quote based on your general information. With more accurate numbers, you can make an informed choice as to who has the best financing for you.

While there are several different types of 1% mortgage loans, there are really only two major keys to winning with a 1% mortgage loan.

The first key is to make sure the loan is set up correctly from the beginning.

And the second is to make sure you are using the loan correctly to gain the most benefit.

First, let’s talk about how the loan works. Then we’ll get into how to set the loan up correctly so you can reap the financial rewards these mortgage loans have to offer.

To start with, 1% mortgage loans have payment options. Each month when you get your mortgage statement you will have the option to make a 30 year fixed payment, a 15 year fixed payment, an interest only payment and a minimum payment at 1%.

Although you are given several payment options, you should only select the 1% minimum payment.

Why?

Because if you wanted to make a 30 year fixed, 15 year fixed, or interest only payment, you would be better off getting that type of loan. Typically, these payments are higher with a payment option mortgage loan.

If you select the 1% minimum payment your first benefit will be a significant monthly payment reduction. Your mortgage payment will likely be cut in half. Of course, this is a pretty attractive first benefit for most home owners.

To compound the effectiveness of selecting the 1% minimum payment you should save what you save. For instance, let’s say you refinanced your home with a 1% mortgage loan, paid off all your credit cards, and reduced your monthly payment by $1,000 a month.

Now, if you save that $1,000 a month for yourself instead of giving it to your creditors, you will have $60,000 in cash at the end of five years – And that’s with a zero percent return.

Here’s the second benefit to selecting the 1% minimum payment option:

Tax savings.

If you make an interest only payment your mortgage balance will stay the same. If you make a 1% minimum payment you are actually paying less than interest only. Therefore, you are creating deferred interest which makes your mortgage balance increase each month.

Before you freak out, keep in mind that deferred interest is mortgage interest and is therefore tax deductible.

Let’s say your home is going up in value $2,000 a month. The 1% mortgage loan will allow you to take a small piece of that appreciation, say $500 a month, and turn it into a tax deduction.

So you are taking a small piece of your equity each month and turning it into a tax deduction. If you did not do this, all of your appreciation would be locked up in equity.

Equity is terrific and is certainly one of the many benefits to home ownership. But investing in equity will get you a zero percent return.

No one is going to cut you a check each month for the equity in your home. As a matter of fact, if you wanted to get the equity out of your home you would have to sell your home or get a loan. And you better qualify or you will not be able to get a loan.

So why not take a small piece of your equity each month, turn it into a tax deduction, and at the same time save $1,000 a month for your self? You will still have plenty of equity but with a 1% mortgage loan you will have cash AND equity.

If you do this for any length of time you will come out way further ahead financially than if you did a regular 30 year fixed or an interest only mortgage loan.

By the way, if the deferred interest is a concern, try making bi-weekly payments. Making a bi-weekly payment will reduce, and in some cases eliminate the deferred interest all together. Which means your mortgage balance would not increase.

How to set the loan up correctly:

1) The 1% payment option on these loans is only available for the first five years. But you could actually keep one of these loans for 30 or 40 years. If you select a 40 year loan your monthly payment will be lower but the payment options will not last for five years. The name of the game is to keep the 1% payment for as long as possible. So get a 30 year amortization.

2) The 30 year, 15 year and interest only payments are tied to an index. Select a slower moving index like the MTA (Monthly Treasury Average) instead of a faster moving index like the Libor (London Inter-Bank Offered Rate).

So how can you lose with a 1% mortgage loan?

Answer- depreciation.

If homes in your area are rapidly going down in value, deferred interest could cause you to become upside down in the home.

But if your area is experiencing a 3% to 5% rate of appreciation and you save what you save by making the minimum payment, a 1% mortgage loan can have an incredibly positive impact on your financial future