Know Your Home Refinance Loan Payment Outlook
You’ve been offered a loan and the numbers look good. But
it’s difficult to know exactly what your new 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 new 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 homeowner’s insurance 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 that 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 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 live with 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.