THE BEST MORTGAGE LOAN is no mortgage loan. These may be surprising words, given that they come from a real estate broker and a mortgage lender. Most mortgage loans make real estate sales possible, and they are the bread and butter for any mortgage lender. But we know how correct those words are. - This isn’t the first time you will come across words of warning about the risks of highly leveraged borrowing (high-loan-to-value loans). The great exception is buying a well-priced property to occupy as a primary residence along with the willingness to live frugally and personally do much of the home improvement work.

The next best real estate loan under any real estate circumstance is a fixed-rate long-term loan with moderate closing costs.

High closing costs dramatically increase the true total cost of a mortgage loan if it is repaid in one, two, or three years, and it’s much worse if it’s paid off sooner. It’s hugely worse if it is paid off early and also contains a pre-payment penalty. Thus, it is almost always better to focus on closing costs, fixed-rate terms, and absence of pre-payment penalty than to focus on interest rate.

Some lenders take advantage of the consumer tendency to focus on interest rate. They advertise then try to direct borrowers to a loan with a low appearing rate and high closing costs. It is almost invariably a far worse choice for the consumer. Let’s investigate why that is.

Most mortgage loans are paid off long before the term is up. Most mortgage loans have a relatively long term often, fifteen, twenty, or thirty years, even if they are adjustable and the rate moves sharply higher after the initial fixed-rate.

The reasons for the mortgage payoff early are many. Here they are, in no particular order:

• Sale of property: “This may be triggered by a number of factors, including an employment transfer; the need to downsize; increase or reduction in family size, death, disability, or relocation to elderly housing; retirement move; the desire for another property; a move to a larger home.
• Refinance of the property: This may be triggered by some of the above reasons, as well as a need for additional funds for a broad range of purposes, including college expenses; repayment of other non-tax-deductible debt; home improvement or addition; general living expenses; investment or business purposes; or to buy a second home or recreational property. Some refinances are driven by lower interest rates, which make a refinance advantageous (particularly if closing costs are low or zero)

Early repayment of a mortgage

A mortgage company has refinanced thousands of clients with total closing costs ranging from $900 to nothing down. These clients typically paid an interest rate generally one-eighth or one-quarter percent higher than borrowers at other firms with much higher closing costs and saved dramatically when the loans paid off early. Closing costs generally don’t become tax deductible for most people, and interest paid generally is. With early payoff or multiple loans, those low or nonexistent closing costs saved customers thousands of dollars.

Some borrowers refinance because of a need for a lower monthly payment amount, perhaps refinancing from a fifteen-year to a thirty-year term, even at a slightly higher interest rate, for a lower monthly payment. A loan may pay off early for any of these reasons and many more.