A loan has three facets:
The first of these is self-explanatory, although there are choices you can make with regard to the down payment. The other two are more complicated. Let's look first at the interest rate.
The annual percentage rate (APR) is a method developed under federal law to inform loan applicants of the actual interest amount that will be paid on a given loan over the life of that loan. It makes it easy to compare one loan to another by making it an apples-to-apples comparison. You should, however, use the APR as a tool in evaluating a loan, not as the sole factor in making your decision.
To understand APR, you must first understand the concept of points. A point is 1 percent of the loan amount. If the loan is for $100,000, a point is worth $1,000.
There are two types of points: origination and discount. Origination points are the fees normally charged by a lender and sometimes by a mortgage broker for originating, or starting up, your loan. Discount points are charged to lower your interest rate, and this lowers your payments. In other words, if you pay some more money up front, the bank will let you pay less over time.
Either type of points should be considered as interest that you pay up front, and you must therefore figure them into your cost of the loan. If you take out a loan for $120,000 at 9 percent for 30 years and you pay one origination point and one discount point, you're paying a total of two points, or $2,400. Your payment will be $965.55 per month.
To get the proper APR on your loan, you have to add that $2,400 to your starting balance, since it is interest, albeit prepaid. This makes your total loan $122,400. Figure the new payment on that balance, which works out to $984. Now return to the original loan amount and compute the polynomial backwards to reach the interest rate it would take to equal the payment on the total loan. It works out to roughly 9.23 percent.
In paying points to lower your rate, a good rule of thumb is that it will take you about five years to make up the additional point(s) paid. Then you will begin saving money over the remaining term of the loan.
By federal law, lenders are required to send you a Truth in Lending (TIL) statement within three days of applying for a loan.
The most common term for a fixed-rate mortgage is 30 years, with 15 years the next most common.
In some quarters, a 30-year versus 15-year mortgage debate rages, but one thing is sure: You will pay much more interest over the term of the loan (in most cases, double) on a 30-year mortgage. However, a 30-year mortgage will offer lower monthly payments. You'll be getting a tax write-off for the interest portion of your payments, which could be substantial. On the other hand, in the first 15 years of your loan, you will line someone else's pocket with interest while not building up significant principal for yourself.
Let's say you buy a $150,000 home. You put down 20 percent, or $30,000, which leaves you $120,000 to finance. If you get a 30-year loan at 8.5 percent, your payments are $922.70. After five years of payments, your balance owed is $114,588. If, on the other hand, you obtain a 15-year mortgage at 8 percent (rates are lower with shorter-term loans), your payments are $1,146, or $224 more each month. After five years in this loan, however, your balance is only $94,000. That's quite a difference when it’s time to sell.
In summary, a 30-year loan is good for long-term stability. If you can afford a 15-year mortgage, you will build principal faster. Remember that by paying what would be equal to the 15-year payment on a 30-year loan, it will pay off in 15 years, but you'll have the cushion of the lower payment should money problems arise.
There's one other categorization of loans, which has to do with its size. A conforming loan is less than the Federal National Mortgage Association’s legislated mortgage amount limit, which is currently $240,000 for a single-family home. A jumbo loan, also known as a nonconforming loan, exceeds that amount. Since such jumbo loans cannot be funded by the agency, they usually carry a higher interest rate.
The amount of time between putting an offer down on a house and actually taking possession has its ups and downs. It continues with the serve-and-volley that may ensue after your offer has been received. Then, if your offer is accepted, it continues through the logistics of the loan, the discoveries at the home inspection and the actual closing. It's a real roller-coaster ride, with all the attendant thrills and acceleration.
The purpose of this article is to both provide information and facilitate general dialogue about various employment-related topics. No legal advice is being given and no attorney-client relationship created. Please see the disclaimer for further limitations and conditions.
