Mortgages: It's NOT all about the monthly payment

No one wants to make too-high monthly mortgage payments. But becoming so mesmerized by a low payment that you ignore the other aspects of a new home loan can be a costly 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 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 advantages for certain borrowers. For example, an adjustable-rate mortgage might be attractive for borrowers who plan to move in the short term while points may make sense for borrowers who plan to stay put for many years. Either way, borrowers 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. Consider also whether the rate is locked, how rate adjustments are structured, whether mortgage insurance is required and whether the lender will retain or sell the loan and servicing rights.

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.

 

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