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It’s Not Always About the Monthly Payment – No, Really, It’s Not

Factors other than your monthly payment should be considered when choosing your home loan.

Nobody wants to make a high monthly mortgage payment; why would they? However, becoming so focused on a low payment that you ignore the other aspects of a new home loan can be a expensive mistake. That’s because a home loan isn’t just a payment; rather, it’s a package of benefits and obligations that could be yours for a very long time.

Monthly payments that seem too attractive to be true – which they usually are – can result from a number of situations. Here are some of the possibilities:

No rate lock. The payment could be based on an interest rate that isn’t guaranteed and then becomes unavailable either because market rates have changed or only the crème de la crème of borrowers can meet the requirements for that rate.

Short adjustment period. The payment could be very short-lived. Adjustable-rate mortgages typically are fixed for three, five or seven years, but some loan products have rates that adjust after one year or, in the most extreme cases, one month.

Negative amortization. Your monthly payment might not cover all the interest that’s owed each month, which means the amount you owe could increase over time though negative amortization.

Buy down or points. The payment could be based on a buy-down or points, both of which involve sums of money paid upfront to reduce the interest rate. A buy-down usually applies only to the first few years of the loan.

High fees. The payment could be offered on a loan product that has other unattractive upfront fees or costs.

All of these situations could be advantageous for certain borrowers. For example, an adjustable-rate mortgage might be attractive for a person who plans to move in the short term while points may make sense for borrowers who plan to stay-put in the same home (and the same loan) for many years. Either way, you should carefully consider all of the terms of the loan and not just focus on which option offers the lowest monthly payment.

One way to assess the cost of a loan is to compare the annual percentage rates (APR) of comparable loans. The APR reflects the cost of the loan over the term; including all up-front costs. Consider, also whether the rate is locked, how rate adjustments are structured and whether mortgage insurance is required.

A very low payment might enable you to buy the home of your dreams today, but if the terms of the loan could be detrimental to your long-term financial wellbeing, you might want to reconsider. Buying a less costly home, borrowing a smaller sum or making higher payments in exchange for less risk, or more appropriate loan terms, might be smart decision.

If, after reading all of this, you still feel that payment is the most important factor in your mortgage choice, consider the following. Depending on your long term financial goals, extending the term of your loan may be the way to go. When you make this choice, however, consider the data in the graph below; it shows the relationship between the payment and term at any give rate and loan amount as well as the relationship between amount of principle paid on the 12th scheduled paymentand the amount of principle paid on the 72nd scheduled payment.  As you can see, a shorter term will have a higher payment, but will have a lot more of the money going toward principle.  A 50 year term, which does exist today, is essentially an interest only loan for the first twenty years because you make very little headway on your original principle balance.  If the 50 year is the option you like the most, you may want to consider simply getting into an interest-only loan because the interest rate will undoubtedly be less than it would be for a 50 year fixed causing your payment to be even less.

Graph of Several Mortgage Types

Parts of this entry are paraphrased from an article published by; to read the original article, please click here.

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