Know Your Home Mortgage Loan Payment Outlook
You’ve been offered a loan and the numbers look good. But it’s
difficult to know exactly what your monthly payments will be. After all, this is the
number you will need to budget for each month for a long time. Let’s make sure
it’s a number you can live with.
Don’t be surprised when you get your first mortgage payment – find out
exactly what to budget for each month.
Fixed-rate mortgages make it fairly easy to determine your monthly payments. Adding in
your other costs like property tax and PMI can give you a more accurate estimate. It’s
a good idea to factor in any recurring costs associated with your loan to help you determine
if you can afford it.
ARMs are more complicated than fixed-rate loans and there are two factors you should know
about that determine your payments – the index and margin. The
index is what your interest rates are tied to. Ask your lender which index they use and how
it compares to other indices.
The margin is extra points your lender charges for the loan. The index plus the margin
determines your interest rate. At the end of your initial period, the margin and current
index rate are added together to determine your new interest rate. Margins are included in most
ARMs, so make sure this is a number you can live with. The combination of both higher interest
rates and your margin can often cause your payments to increase quite a bit at each adjustment.
See how much you will be paying each month when your ARM adjusts.
For example, if you buy a 3/1 ARM at an initial rate of 5% and interest rates continue to
rise over the next 3 years to around 7%, you would pay the 7% interest rate plus your margin
(say 2.5%) for a new interest rate of 9.5%. As you can see, when ARMs adjust, you can be hit
with a substantial payment increase. Most ARMs have a lifetime cap which stops the total interest
rate from exceeding a certain number. Be sure you ask about both the margin and lifetime cap
when getting into an ARM – and make sure these are numbers you can tolerate if and when
you have to encounter them.
Can I lower my payments?
See exactly how long you need to keep your loan to make paying points worth it.
If the monthly mortgage payment seems too high, you may have the option of lowering your
monthly payments by paying points. Points are equivalent to paying interest up front. If you
plan to stay in your home for while, it makes sense to pay points to bring your monthly
payments down. Are you going to stay in your home for a while? If so, let’s see how
paying points can lower your monthly payments.