November 27, 2009, Newsletter Issue #195: Compare Short Term vs. Long Term Cost

Tip of the Week

The true cost of a mortgage loan can be a complex, but always critical, component of the entire process. Becoming a smart shopper can save you thousands of dollars in both the short- and long-term, while not asking the right questions can cost you a great deal of money.

Short-term expenses are primarily related to closing costs, the amount of money you will pay to close your mortgage loan. Many of these fees are almost identical regardless of which mortgage lender you select. Costs such as recording fees, flood certification, surveys, tax service fees, and other municipal or standard closing fees are very similar in most cases. Others, however, can vary widely depending on your origination source or actual mortgage lender. Points, loan discount and origination fees, legal closing fees, title insurance, and “junk fees” (underwriting, processing, warehouse, and document prep fees) can easily amount to short-term costs in thousands of dollars. Compare, compare, and compare all of these completely! Do not hesitate to question any of these short-term costs.

Long-term costs primarily involve your stated interest rate. If you are considering a fixed rate loan, this comparison is relatively simple. The stated rate is the one that will be charged throughout the life of the loan, be it three, five or twenty-five years. You should still compare the federal Truth-In-Lending (TIL) statement you will receive right after application – or, better, ask for one before you make application – to compare fixed rate loans. If your stated rate is six percent and you notice one TIL showing an effective rate of 6.115% versus another that shows 6.258%, you will be forewarned that one loan carries considerably higher short-term (closing costs) expenses than the other.

If you are considering an Adjustable Rate Mortgage (ARM), a TIL is absolutely critical. Your starting rate, while important, is not the most critical component of this type of loan. The most important long-term factor is the projected cost over the life of the loan. ARM’s have items you need to compare in an “apples-to-apples” situation. These items are –

Index – the published “base” rate used to calculate future rate changes; Margin – the percentage that will be added to the index at rate change date to result in your new rate; Adjustment Rate Cap – the maximum your rate can increase at each rate change date; and Lifetime Cap – the maximum your rate can increase (from your start rate) over the life of your loan. The TIL statement you receive will calculate what this loan may cost you if maximums are met at each adjustment date. Remember, these are only worst case projections and my not reflect how your rates actually change in the future. If you are planning on keeping this mortgage for five years or more, the long-term cost is critical to your decision making process.

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