Do you know how to get your lender to lower your mortgage rate without refinancing? Learn the best ways to reduce mortgage interest rates here.
Offset mortgages help you to lower interest mortgage rates by taking advantage of the fact that the interest rates for mortgages are higher than that of savings accounts.
When you apply for an offset mortgage, you're applying for a savings account that is linked to your mortgage. You don't earn any interest from this linked savings account - Instead the money in it is used to reduce the outstanding balance of your mortgage.
For example: You have $200,000 of mortgage loans and you deposit $20,000 into the linked savings account. What happens now is that you will only have to pay interest on the remaining $180,000 instead of the full $200,000. Assuming a mortgage rate of 8% and remaining mortgage term of 10 years, your monthly mortgage payments will fall from $2,426.55 to $2,183.90.
An offset mortgage also offers you tax benefits. While the interest from a normal savings account is often taxable, you won't have to pay a single cent in taxes for the money in your mortgage savings account.
The tactic of using offset mortgages to lower mortgage interest rates is already common place in the United Kingdom and Australia. In recent years, it has also been gaining popularity in the United States.
Of course, there is always a catch. The interest rates for offset mortgages are about 0.5 to 1.0% higher. On top of that, the money that you leave in the linked savings account will be locked in for a long time so offset mortgages are more suited for individuals with spare cash.
If your lender comes by and drops a mortgage loan with no closing costs into your lap, tread very carefully and ask a lot of questions. These no cost mortgages are also known as no fee mortgage or zero cost mortgage, and they all operate in the same way.
Since applying for a mortgage loan can chalk up to a few thousand dollars in agent, transaction and closing fees, no cost mortgages look really appealing at the first glance.
However many borrowers have the learned the hard way that there is no free lunch (especially when you're dealing with lenders and banks). The closing costs that you save right now will roll over to (typically 0.25 to 0.5%) higher interest rates over the lifetime of the mortgage loan.
The devious thing is that the additional mortgage rates that you have to fork out may seem like peanuts but can work out to be sizable sums.
For example: You have a $200,000 mortgage over 30 years at 8% interest rate. What will happen if you choose a no cost mortgage which pushes your mortgage rate to 8.25%?
While this 0.25% additional interest will increase your mortgage payments by just $35 every month, you will end up paying about $12,600 more over the entire course of your 30 year mortgage.
In almost all cases, rejecting no cost mortgage is a sure way to lower your mortgage rate. To actually save money on your mortgage closing costs, Click here for our full guide on how to lower mortgage closing fees.