May 25th, 2017 5:35 AM by Jackie A. Graves, President
getting ready to take out a mortgage? Before you commit to a loan you'll pay
for over the next three decades or so, make sure you know exactly what you're
who don't understand their mortgages could get into big financial trouble, but
you can make certain you're not one of them by confirming you know the answers
to these six key questions.
is the interest rate?
of mortgage holders in the United States don't know the interest rate on their
loan. This is a big mistake. Your interest rate makes a huge difference in the
monthly payments and total interest you'll pay.
borrow $318,000 -- around the average loan for buyers as of April 2017 -- and
pay an average rate of 4.23%, your monthly payments would be $1,561,
and the total cost of your loan would be $561,833.
rate were just a little lower at 4%, your payments would be $1,518 per month,
which means you'd be saving $516 a year. The total cost of your
loan, $546,545, would be more than $15,000 lower than what you'd pay at
the higher rate. On the other hand, a rate of 4.5% would cost you $600 a year
more -- and more than $18,000 more over the life of the loan -- than if you'd
taken out that 4.23% loan.
small changes in interest adding up to thousands in extra costs, know exactly
what your rate is. If it's higher than the national average, find out why.
Unless that high rate is justified -- perhaps because of bad credit -- shop
around for a more affordable lender.
2. Is the
mortgages (ARMs) were a major contributing factor to the 2008 mortgage crisis,
because many homeowner's couldn't pay their mortgages when rates were adjusted
upward. Too many of these homeowners didn't understand their loans. You
don't want to make that costly error.
paperwork must specify whether a loan is a fixed-rate loan, which means the
interest rate cannot change throughout the mortgage term, or an adjustable-rate
loan, which means the rate will change along with the prevailing interest
rates. Adjustable-rate mortgages are not necessarily bad, especially given that
their initial rates are lower than those of fixed-rate loans. But don't take
out an ARM unless you know you can afford the costs even if rising interest
rates lead to higher payments.
must disclose the timeline for when rates begin to adjust -- usually your
initial rate is guaranteed for five to seven years -- and the formula used to
calculate new rates. The paperwork must also specify how frequently the rate
can adjust and the absolute maximum rate.
can still afford your loan in the even your rate goes up, then an ARM is OK.
But don't assume you'll be safe from increases because you plan to move or
refinance before your rate goes up. Plans change, property markets collapse,
and selling or refinancing could become impossible. Don't get trapped in an ARM
you can't afford, especially if you can qualify for a fixed-rate mortgage with
reasonable rates and payments you can swing on your salary.
3. Am I
paying any points?
borrowers have the option to lower interest rates by paying discount points,
which are essentially pre-paid interest. You pay more up front to buy down your
interest rate. Points cost 1% of the mortgage amount, so you'll pay $1,000 to
buy a point for every $100,000 in borrowed money. A point on a $318,000 loan
would cost $3,180.
point lowers your rate by 0.25%, which saves a lot in interest if you'll
be in your home for a long time. On your $318,000 loan, buying one point on a
4.23% mortgage would bring your rate down to 3.98%. This would lower your
monthly payment to $1,515 from $1,561 and cut your total loan costs to $545,226
from $561,833. Given the savings of $552 annually, you'd take a little over
five years to make back the $3,180 cost of the point, and the additional
savings over the remaining 25 years would be gravy.
to understand how points work to decide whether to buy them and to
make sure you're comparing apples to apples when shopping for a mortgage. If
one lender offers a rate of 4.23% with one point paid, and the other offers
4.23% with no points, you're far better off with the second lender.
closing costs will I have to pay?
usually pay between 2% and 5% of a home's purchasing price in closing costs.
This is a big range, and you don't want to pay more than necessary. Read
mortgage paperwork carefully to find out what you're being charged for loan
origination, appraisals, application fees, courier fees, private mortgage
insurance, and underwriting fees.
mortgages -- especially cash-out refinance loans -- incorporate closing costs
into the loan so you borrow more than you need, and the excess pays your fees.
Alternatively, lenders may charge higher interest rates to give you credit
toward closing costs so the up-front fees are lower. Both options mean you're
stretching out the payment of closing costs over the life of the loan. Don't
agree to this unless you know what your costs are, you're OK with paying them
over time, and you've compared expenses across different lenders.
there a pre-payment penalty?
want to pay off your mortgage early or refinance with a different lender, you
want the flexibility to make those financial choices. Unfortunately, some
mortgages have prepayment penalties, which means you'd pay extra for the
privilege of paying back what you owe. The reason they do this is to keep you
paying interest on the balance for as long as possible.
If a loan
you're considering includes a prepayment penalty, look for a different lender
who won't deprive you of the ability to make the right financial decisions for
long do I have to pay off the loan?
mortgages give you 30 years to repay the balance, although 15-year mortgages
are also somewhat common. Options like 40-year mortgages are available
from a limited number of lenders, but it's not usually a good idea to stretch
out payments for this long, unless you want to struggle to pay a mortgage
loans, like a balloon mortgage, may give you a short time to repay -- usually
around five to seven years -- but your monthly payments will be similar to
those of a 30-year mortgage. This means your monthly payments will be low, but
you'll have to repay the remaining balance all at once at the end of the five-
or seven-year term. This is risky, and these mortgages are almost always a bad
consider repayment terms, remember that a longer loan means you pay more in
total interest but have lower monthly payments. It's up to you to decide what
makes the most sense for your financial goals.
By Christy Bieber - To
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