Mortgage Secret #1, The Interest Rate Is Not as Important as the Total Interest You Pay

Why is this true?

Check my post, “How much interest do you really pay?”

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

What is the first question most people ask when shopping for mortgage financing?

“What is the interest rate?”

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.

Think about this for a moment.

Let’s say that you are 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 you do it very well and that you actually save a whole one-half percent on the interest rate.

However, you still pay that loan back over thirty years as the lender wants you to.

Do you realize that you will only save about $10,000 in interest? For example, on a $100,000 loan at 4%, you were paying $72,000 in interest, now it will cost you $62,000 in interest! A savings of $10,000 helps, but it’s not a huge savings when you put it in perspective.

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

This is a significant savings – but it’s only possible when you focus on what really matters instead of trying to do what most people do.

However, most people don’t realize this truth.

They are out there shopping for mortgage financing, calling everyone in town, nitpicking on the rate, thinking that if they find the lowest interest rate that they have found the best financing for them.

They never stop to think that there is a better way – that it is the time you take to pay back the mortgage loan that is most important, not the rate.

Also, what’s interesting is that when you pay back a mortgage loan quickly, in 7 years instead of 30, the interest rate is much less significant. It doesn’t matter so much whether you have a 6, 7 or 8% rate (see the chart above).

Be certain that you do not fall prey to the psychological tendency of “anchoring.”

In their book Why Smart People Make Big Money Mistakes, authors Gary Belsky & Thomas Gilovich describe anchoring as “the tendency we all have of latching on to an idea or fact and using it as a reference point for future decisions.”

They continue by pointing out that people are especially vulnerable to anchoring when they know little about the product in question. I have found in my years of experience as a mortgage consultant that most people don’t understand much about the process of getting mortgage financing.

Therefore, “anchoring” says that the less someone knows about a particular subject, the more they will grab onto any piece of information that seems to make sense, even if the information is incorrect or is the wrong place to focus.

Unfortunately, mortgage advertisers and most lazy typical run-of-the-mill loan officers have done a good job of getting people to think only about the interest rate. Since most people don’t really understand the process, that can be an easy way for them to believe they are making a smart mortgage decision.

Remember, focusing on the total time you take to pay back the loan is how you get the lowest cost, not by focusing on the rate.