June 29, 2018
June 29, 2018
Mortgages inspire more emotions than any other type of loan. You can physically reap the benefits of the loan more acutely than any other kind of debt.
But mortgages are complex loans with a variety of moving parts, and no two mortgages are alike. While finding a house that fits your criteria may seem like the hard part, finding a mortgage is the most important part.
That’s because a mortgage is a financial instrument, and like other instruments, it’s full of a variety of moving parts that keep it running. To analyze your current or next mortgage, see below for the pieces you need to identify.
Many compare mortgages based on the interest rate because it’s easy to see. But rates can vary wildly depending on how long your mortgage is for.
For example, a 30-year mortgage with a 3.625% interest rate will cost you $164,178 total while a 15-year mortgage at 3% interest will only cost $124,305. That’s almost $40,000 more you’ll pay.
The shorter your mortgage term, the lower interest rate you’ll get – that’s why monthly payments will often only differ a few hundred dollars between mortgages of two different lengths.
Investment Advisor Representative Paul Tarins said mortgages come with a variety of fees that many homeowners discount when comparing two different loans. There are origination fees, which is a processing fee you pay when getting the loan, and points, which is a fee you pay to secure an interest rate.
“When you take the points and origination fee, if any, and add them to the total cost of the loan you can then figure out what the true interest rate will be,’ he said.
Often, people buy a home after they realize they could pay less for a mortgage than rent. But closing costs and other fees have to be paid upfront. If you end up only staying at the home for a few years, you could lose money on the deal.
Also, the less time you spend in the home, the less equity you’ll build up. If you only plan to stay in your home for five years or less, you may consider staying in the renter’s market.
John Schneider, co-founder of Debt Free Guys, said because homeownership is still a tenant of “The American Dream,” many people fail to consider how a mortgage can affect how much money they have to spend on other things.
One of the major aspects to consider when buying a home is if it will change how much you have to spend on entertainment, travel and your hobbies. A mortgage that takes up a large portion of your take-home pay may not allow you to have a rich life.
“If you want your life to be more than a home, don’t make yourself house-poor,” he said.
Those who cannot afford to put down 20% on their mortgage will often have to pay private mortgage insurance or PMI. This is usually around 1% of the cost of the loan per year and ensures that if you stop making payments, the bank will get its money back.
Once you reach 20% equity in the home, you can stop paying PMI. While some mortgages allow the PMI to fall off easily once you hit that marker, others, such as FHA loans, require that you refinance the home into a new loan.
While buying a home and taking on a mortgage can be daunting, if you understand the financials and how they affect your bottom line, it’s an adventure worth taking on.