Home Loans: Beyond the Monthly Payment
When shopping for a home loan, the affordability of the monthly payment is obviously a key factor in your decision. But it shouldn’t be the only consideration. Avoid paying too much for your loan: consider these questions.
Will your payments ever go up?
Some loans that have a low monthly payment are adjustable-rate mortgages, which means that when the rate changes so do your payments. In a rising rate environment, that means your payments may go up hundreds of dollars. Before you sign the loan documents, make sure you run the numbers and make sure you have a plan for any future payment changes.
What is the length of the loan?
Another way lenders achieve a lower monthly payment is to lengthen the term of the loan, from thirty to forty years, for instance. That means if you get a loan at age 35, you’ll still be making house payments until you are 75, well past retirement age. A longer term means that you’ll not only make payments for longer, but paying more in interest over the life of the loan as well.
Does the interest rate include discount points?
Generally speaking, the lower the interest rate, the lower the monthly payment. A very low rate can be achieved by paying discount points, which are essentially pre-paid interest. However, discount points can significantly increase your upfront costs. Typically one “point” costs about one percent of the loan amount and reduces the interest rate by about 0.25 percent. So on a $150,000 loan, paying one discount point will cost you $1,500.
How much are the fees?
The bulk of your closing costs are usually made up of your down payment, so it’s easy to lose sight of the comparatively smaller portion that is made up of lender fees. Ask about every fee and whether it’s required.
What is the total cost of your loan?
The answer is contained in the APR (Annual Percentage Rate). Unlike the interest rate, which is merely the percentage of the loan amount the bank charges you to borrow money, the APR takes all the costs of the loan – the interest rate, plus the lender fees and discount points – and expresses it as a percentage of the loan amount. It is a truer expression of the total cost of your loan.
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