One of the most effective uses of your time during the real estate process is to compare home loan rates as they relate to your down payment. Banks love to lure you in with the promise of a low down payment or a low annual percentage rate (APR) that ends up costing you tens of thousands of dollars. The loan program that has the lowest interest rate is not always your best choice. Here are five questions that you should ask yourself before you get started with any loan program.
Are you considering your private mortgage insurance (PMI) payment?
If your loan is insured by the Federal Housing Administration (FHA), then there are new rules that you should consider. Under the current changes, the FHA now requires you to pay your PMI for the life of your loan if you start with under 20 percent equity. The PMI can add the equivalent of another full percentage point to your interest rate per year, and this does not even consider the effect of compounding interest or fluctuating market rates on your monthly payments.
You may get an enticing initial interest rate from the FHA for a low down payment loan, but if you start with less than 80 percent loan to value in your home, then you may end up paying that interest back with interest in the form of a not so hidden PMI.
Should I pay for mortgage discount points up front?
On the average, paying for mortgage points just to get a lower APR is a bad idea for anyone who is planning to stay in a house for less than a decade. The APR might seb lower, but the loan is front loaded with all of your fees and interest heavy payments. You may choose to pay for the mortgage points and roll the fees over into your loan, lowering your down payment and raising your loan amount. This is usually one of the worst mistakes you can make, especially if you cannot reach 20 percent on your down payment and are now paying PMIÂ because you redirected those funds into the points.
Should I take an adjustable rate mortgage (ARM) to try to lower my down payment?
At the beginning of your negotiations, your bank does not necessarily guarantee how much you will pay in fees. The Good Faith Estimate document that you receive at the beginning of the process is estimating these fees, and there is nothing saying that a bank cannot estimate these fees as optimistically as they please.
Fees that you pay affect your APR, meaning that your APR is an estimate as well. If you are rolling over fees into your loan because you do not have enough cash on hand, then your down payment minimum to avoid PMI and reach lender minimums may balloon in an unexpected way. This only becomes more of a risk if you try to counter this by picking an ARM, which banks can just estimate in an optimistic way as well.
Am I planning to do something unexpected with my property?
Let’s be clear: “Something unexpected” with the property means anything other than paying every mortgage payment on time with no extra payments for the exact timetable of the loan without selling or refinancing. This is the situation that the banks assume when they calculate your APR and sort those quotes in online advertisbents.
This shaky math will also be used if you are planning on a PMI payment. The bank must estimate when you will hit 80 percent loan to value, and as mentioned before, you will still pay PMI if your loan is insured by the FHA anyway.
In short, your APR will probably end up higher than the advertisbent, meaning that your down payment minimum will be higher. If you are planning to pay off a property early, play the market and refinance, or make an extra payment at any time, then you should not look for a loan by APR. This is an especially bad strategy if you are looking for a loan with a low APR that also advertises a low down payment.
What about zero closing cost mortgages?
One way to get rid of one of the variables in your calculations is to look specifically for zero closing cost loans. What you must realize is that these fees are just rolled up into the loan, but at least they are more fixed in nature. The APR that you see will end up being closer to the APR that you pay, meaning that the loan amount will be set, meaning that your down payment will be set.
Fixing this puzzle piece solidly in place may be the best option for you if you are looking to compare your home loan rates competitively and somehow minimize your down payment as well.
Overall, playing the systb too much with too little money will only turn out badly for you in the end. Your best strategy is to save up far more than the minimums for your down payment, origination costs, and closing costs. You gain exponential amounts of leverage if you have just a little more cash.
2 Point Highlight
Let’s be clear: “Something unexpected” with the property means anything other than paying every mortgage payment on time with no extra payments for the exact timetable of the loan without selling or refinancing.
If you are planning to pay off a property early, play the market and refinance, or make an extra payment at any time, then you should not look for a loan by APR.
