NEW YORK (TheStreet) -- Anyone up for earning "incredible yields with no risk"?
That sounds like a come-on for an investment that in truth is loaded with risk, or maybe for an out-and-out scam. But it's not. Big yields -- 7%, 8%, maybe more -- are available, guaranteed, if you can live with tying your money up for years, perhaps decades.
That's a big "if," but this investment strategy is worth considering if you're taking out a mortgage. It's simple: Make a bigger down payment.
The gains come in several forms. First and most well known is the savings on interest payments. If the mortgage charges 4.25%, every extra dollar put into the down payment will save 4.25 cents a year on interest charges. This is a guaranteed yield, exactly like earning 4.25% in a bank account or money-market fund.
That's pretty good, since actual bank savings pay well under 1%. But wait, there's more ...
Many borrowers pay points, which are upfront interest payments, to reduce a loan rate. Since each point is 1% of the loan amount, reducing the loan by paying more down cuts the amount paid in points. On his website, Jack M. Guttentag, emeritus finance professor at the Wharton School, shows how this could raise that yield on extra down payment to 4.43% from 4.25%. The actual amount would depend on how long the borrower kept the loan, since the one-time 1% savings would be spread over the years.