Understanding Your Mortgage

Mortgage Costs
Cost-cutting has become something of an art form for those who are serious about saving money. One potential area for saving that most people fail to consider is their mortgage. You can shave years off your mortgage and save thousands of dollars in interest by adding a little extra to your mortgage payment each month.

Suppose you took out a 30-year mortgage for $125,000 at 8% interest with monthly payments of $917. Your total payments over the life of the loan will come to $330,194, and $205,194 of that amount will be interest. If you pay just $100 extra each month, your total loan payments will be $265,050. You will save $65,144 in interest and retire your mortgage in 19 years!

Is it in your best interest to pay off your mortgage early? It depends. Your decision should be based on your budget, your long-range plans (how long you plan to live in your home), and your income bracket. Consult your tax accountant to find out if an early payoff is an option for you.

Mortgage Terms

Lenders now offer mortgages that are blends of short-term ARMs and 30-year fixed-rate loans with a lower fixed-rate of interest for a period of 5, 7 or 10 years. Be sure that you understand what happens at the end of the initial term before you sign on the dotted line for such a loan.

Many of these loans revert to a 1-year adjustable rate loan at the end of the initial term and can be adjusted once a year based on an index tied to the cost of money. You should know how much over the index your rate will be set and the limit or cap on how much your payments can increase.

A "balloon" note requires the entire balance to be paid to the lender after the initial period of the loan ends. Most of these loans require the lender to guarantee to refinance the note at that point if payments have been timely. The lender should spell out how the re-finance rate will be determined and what costs will be involved. These loans can help you buy a more expensive house than you could afford with a 30-year fixed rate mortgage; just be sure that you understand the terms so that you can assess the potential risks.

Mortgage Fears

It is not unusual for home buyers to feel that the lender is being very picky during the loan approval process. They have provided all kinds of information and then the lender asks for more. If this process is getting you down, you are not alone. It is important to remember that, in one sense, none of this is personal!

Some lenders have more stringent requirements than others, but every lender requires a substantial amount of documentation on a mortgage loan. They must verify employment, credit history, and recent financial transactions involving your liquid assets. If your Visa payment was late, they may ask for a letter explaining why. If you are self-employed, they will ask for tax returns from at least three years and probably a year-to-date profit and loss statement. It is not that they don't trust you; their regulations require them to document everything. And while the loan officer may know that you are a good risk, the underwriters must be able to defend the loan to a federal bank examiner or auditor.