Many lenders try to make loan programs look super appealing, when in the long term they’re a nightmare. In the short term they look so good: they advertise a low down payment option or a really low interest rate. But eventually, the other shoe is going to drop.
Over the long term, these programs may cost you thousands of dollars.
Extremely Low Down Payment but High Interest Rate
I hear a lot of people — especially first time homebuyers — saying something like, “There’s this great program that has 1% down, and the lender gives me part of the down payment!”
Look closely and you find out that the interest rate is two points higher than the going rate. What that means is the monthly payment is so much higher so that within a year you’ve already spent more than you would have if you had put down a couple thousand more at the beginning.
So for a $200,000 house, for example, within two years you’ve already spent $10,000 more than you would have if you had set aside the minimum down payment required.
Low Down Payment with Large Fees
Some loan programs advertise super low interest rates, but what they don’t advertise is the really large fees that essentially buy the interest rate down. This is a gimmick that is especially common with big online lenders.
They’ll advertise the lowest rates around, but look at the fine print and you’ll see that they’re charging several thousand dollars to obtain that rate. The monthly savings is actually only a few dollars — but you spent thousands to get it. In most cases it’s going to take you 10 or 15 years to recoup that.
These lenders are trying to play on how people feel about their loan. It’s going to be a topic of conversation at a dinner party: “Who has the lowest interest rate?” But I doubt you’ll be talking about what you had to pay to get the lowest rate!
Some loan programs have costs built into the loan. People don’t think too hard about them up front, because they’re trying to get into a house with as little money down and as little money each month as they can. What they don’t realize is that they have substantially increased how much they owe on that house. They also may not realize that they won’t be able to sell the house for quite some time, because they owe too much money on it.
By the time somebody buys the property, because this “awesome” loan rolls in the costs of the loan, the house will not go up enough in value in the next few years for them to be able to pay it off. And that’s not even counting real estate commissions or taxes.
It’s almost like you’re writing a check to sell your own house.
Speak with a consultant.
Loan programs can be very hard to understand, and it can be especially hard to get past the shiny short-term benefits. You really need someone to sit down with you who can pick them apart and show you the long-term costs. Otherwise, you won’t likely figure it out until a couple of years down the road — and you’ll be wishing you could refinance!
We’re happy to sit with you and talk about the best loan programs for your particular circumstance. If you have questions on interest rates, fees, or anything to do with home financing, call 205–986–4220, connect with us on social media, or ping our website. We are happy to help.
— Ben Chenault,
Certified Mortgage Planner
MortgageBanc / Fairway Nmls# 2289
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