Today’s low interest rates make borrowing
money cheap. But watch out for those mortgage fees.
NEW YORK (CNN / Money)
–
If low mortgage rates have motivated you to invest in a picket
fence of your own, you’re in good company. Homes continue to
sell at breakneck speed, and rising property values have
homeowners feeling flush.
But
before you bid on your piece of the American Dream, it’s
important to remember that mortgages still come chock full of
fees, surcharges and closing costs. Lenders, after all, are in
the business of making money.
There
are lots of sneaky ways mortgages can end up costing more than
you think. Take a look at these 6 dirty secrets of mortgage
loans, and make sure no one’s taking you for a ride.
1.
You might not have to pay PMI.
The average down payment on a home by first time buyers stands
at around 10 percent of the purchase price, according to
Freddie Mac. And whenever your down payment is below 20
percent of the purchase price, you must pay private mortgage
insurance (PMI), along with principal and interest payments.
Besides adding another $100 to $150 to your monthly payment,
here’s another downer. PMI can’t be deducted from your
taxes come April, unlike mortgage interest.
What you may not realize is that you can take out two
mortgages and avoid PMI altogether. Assuming you put 10
percent down, the first mortgage would cover 80 percent of the
home’s cost, and the second would cover 80 percent of the
home’s cost, and the second would cover the remaining 10
percent. In effect, that second loan bumps your down payment
to the magic 20 percent threshold. Bingo: No PMI. (Sometimes,
people use an 80-15-5 setup, with 5 percent down and a second
loan for 15 percent of purchase price.)
Of course, that means you now pay two mortgages each month,
not one, and the 10 percent mortgage will have a higher
interest rate than your 80 percent loan, said Frank Nothaft,
chief economist at Freddie Mac.
Still, you’ll avoid PMI and you may save come April 15th,
when you deduct mortgage interest. It depends on where
interest rates stand and your tax situation. Ask your lender
to crunch the numbers to see which method puts money back in
your pocket.
2.
Close at the start of a month and your
closing costs climb. With
any mortgage, you are obligated to pay interest until the
principle on your loan is repaid in full, starting with the
date you close on your home.
But it’s conventional in the mortgage business to set up
interest payments in arrears, to coincide with complete
calendar months, said Doug Duncan, a spokesperson for the MBAA.
That means any time between your closing date and your first
full monthly payment on a purchase mortgage is “extra”
time, and you’ll pay interest on those days up front at the
closing table. That can sting.
Keep in mind, though, that when you close at the start of the
month, your closing costs are higher, but your first mortgage
payment isn’t due until a month later than it would be if
you closed at the end of the month. So you won’t save any
money overall by closing latter, but you do have to cough up
less cash upfront.
“If you pay on a monthly basis, and close on the 25th of the
month, then you have about 5 or 6 days extra interest
payments,” Duncan said. “But if you close on the 5th,
you’ll pay 25 or 26 days worth of interest.”
3.
Lenders may try to muscle you into an
ARM. Consumers often
qualify to borrow much more money with an ARM, or adjustable
rate mortgage, than with a fixed rate mortgage, said Eric
Tyson, author of “Mortgages for Dummies.” That’s why
lenders and brokers often push ARMs aggressively. Larger loans
make for larger commissions, after all..
But many consumers don’t realize the risk inherent with ARMs.
The loan has an extra low, fixed interest rate for a short,
set period of time. One or two years for an ordinary ARM, and
five or seven years for a 5:1 or 7:1 ARM.
But after the honeymoon is over, the loan rate may balloon. It
will the fluctuate in tandem with mortgage rates, which bob up
and down according to the whims of the economy and the Federal
Reserve. Each ARM has a rate cap, so there’s a ceiling on
the interest you might have to pay. But that cap can be set
unaffordably high for the borrower.
Generally, it’s advisable to opt for a 30 year fixed rate
mortgage over an arm if you plan to stay in your home for more
than five to seven years.
4.
PMI laws are picky. Private
mortgage insurance on any mortgage issued after July 1999
automatically cancels when you reach 22 percent equity in your
home, in accordance with the Homeowners Protection Act of
1998. You can also request in person to stop paying it when
you hit the 20 percent threshold.
On many private loans, you must have that equity because of
payments you’ve made toward the principal, not because of
appreciation in the value of your home. But if you have a loan
owned by Fannie May or Freddie Mac, the guidelines are more
consumer friendly. You can reach 20 percent equity through
principal payments and home value appreciation, which makes it
easier to dump your PMI.
The Homeowners’ Protection Act also specifies that lenders
must notify homeowners when their equity reaches 20 percent.
But the law applies only to mortgages issued after July 1999.
Mortgages issued before that don’t require notification so
it’s up to you to remain vigilant.
5.
You can sometimes avoid a jumbo
mortgage. The Federal
Housing Finance Board raises the maximum allowable size for a
standard mortgage each year, known as the “conforming loan
limit.” Currently, the conforming loan limit stands at
$300,700.
Any loans larger than that, which are becoming more common in
today’s hot housing market, are considered to be a
non-conforming or jumbo loan. Thing is, jumbo loans generally
force you to add 20 to 25 basis points to the interest rate
you’d pay on a standard sized loan, said Jay Brinkmann, a
financial economist at the Mortgage Bankers Association of
America (MBAA).
That’s because such loans can’t be bought by Freddie Mac
or Fannie Mae and because high cost properties have more
volatile prices, so homeowners must compensate the bank for
that risk.
But there is one way to work the system.
The conforming loan limit rises at the end of each calendar
year, using a formula. Which makes the change relatively
predictable. Your loan gets classified as a standard or Jumbo
loan when you close. Typically 60 days or so after you make an
offer on the house. If your loan amount is on the edge, and
the new limit lets you take a standard rather than a jumbo
loan, you might consider waiting to buy until November (the
idea being that you probably won’t close until the new
year).
|
