April 7th, 2016 6:31 AM by Jackie A. Graves, President
When shopping for a mortgage, it’s all too tempting to go for
the rock-bottom option—in other words, whatever will keep your monthly
payment as low as possible. Yet bargain hunters should beware: Extremely low
interest rates or monthly payments may look great at first glance, but
they aren’t always the smartest option for every circumstance.
are four instances where you’re better off paying a bit more per month for your home loan, and
why you’ll reap the benefits down the road.
the biggest reason not to reach for the lowest interest rate on the block
is that it’s often attached to an adjustable rate mortgage, or ARM. This
type of loan offers extremely low rates for the first five or seven
years of the loan, which is great for certain circumstances (say, if you’re
definitely planning on moving before that time is up). However, if you’re
planning on staying put longer, an ARM is risky since after the initial
low-interest period, the interest rate adjusts to reflect market
indexes and could shoot up considerably.
safer bet is to get a fixed-rate mortgage—which typically has a higher
interest rate than an ARM, but its saving grace is that it remains the same
over the life of the loan (which may last up to 30 years).
may choose to pay the higher rate on the fixed-rate mortgage because it gives
them the peace of mind to know that the rate isn’t going to change,” says Michelle Bobart, a senior vice president
of mortgage lending and branch manager with Guaranteed Rate. This is especially true
today, because rates are at near historic lows and expected to move
a house is the most expensive transaction that most people will make in
their lives. Plus, on top of that hefty down payment and moving expenses,
you’ll need to cough up more money
at the end of the process for closing costs, which include things such
as fees and taxes and can run around 3% of the value of the loan. What if
you just don’t have enough cash to cover it?
some lenders will offer buyers the option of not paying these costs at closing.
Instead, they will either add it on to the principal of your loan or to the
interest you pay on it. This pay-it-later approach is a smart
option if you’re worried about the levels of your cash reserves. After
all, paying a bit more per month may be worth it if it allows you to eat or
maintain a small emergency fund.
after the housing bust, it was difficult to get lenders to offer loans to
buyers putting down less than 20% on a home. Credit availability has loosened
up since then, with some programs offering mortgages for down payments as low
as 3.5%. The catch? Any mortgage for less than a 20% down payment now
typically requires private
mortgage insurance, an added monthly fee that protects the lender
should you default on your loan.
knee-jerk reaction might be to avoid PMI no matter what, it does make
sense sometimes to take on this added monthly expense. One obvious example is
if you just can’t afford a 20% down payment. Or perhaps you can, but you’d have
to tap investments that would trigger costly taxes or fees if withdrawn.
be a tactical decision to take a loan with mortgage insurance,” says Keith Gumbinger, vice president of
mortgage research site HSH. Use this calculator to get a sense of how the size of your
down payment will affect the cost of your loan.
lenders give buyers the option of paying points at closing to “buy down”
the interest rate on their home loan. Which sounds great … but only if you
have the cash to afford them and you plan to stay in your home long enough to
reap the benefits. Otherwise, they’re an added expense that isn’t worth the lower
For instance: Let’s say you’ve got a 30-year, $400,000
loan. At an interest rate of 5%, you’d be paying $2,147 per month. Now, let’s
say you buy 2 points, which will lower your interest rate by a total 0.5
percentage points, to 4.5%. This will drop your monthly payments to $2,027 over
the life of your loan. Still, you’ll have to pay a total of $8,000 for those
you buy them? It all comes down to how long you’ll live in your home. In the
above scenario, you’ll have to stay there 5.5 years to recoup the cost of those
points. So if you’re planning to stick around, see what you can do to pay
points. But if you’re planning to move, it’s a waste to buy points, even if
they do win you a lower interest rate.
By Beth Braverman - To view the
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