Me Myself N My Mortgage Theories

A lot of people in my neighborhood keep asking me as to how they can reduce their monthly payments. Here are a few considerations that can enable you to lower the payments.

Reduce the mortgage amount: If you are buying a home with a mortgage, I would suggest that you make a larger down payment (at least 20% of the sale price or appraised value, whichever comes out to be the least). This will reduce your loan amount, and hence the interest will be calculated on a comparatively lower mortgage amount.

Look out for the lowest possible rate: As a borrower, you should try to search for the lender who offers a cost-effective loan package, that is, a low rate mortgage. But this does not men that you take the loan from any Tom, Dick or Harry offering a low rate.
Go for a short term loan: When you choose a short term loan, you pay a less amount of interest which keeps accruing with the passage of time. Your monthly payments are lowered as a result of amortization of the loan throughout a shorter loan period.

Apart from changing the terms and conditions of the mortgage, you can also consider taking any of those mortgages that can allow you to lower your paymnts at least for the first few years of the amortization period. The following mortagges can give you some sort of relief from higher payments.

Balloon mortgage: Consider taking a balloon mortgage that will lower your monthly payments for the initial years after which you will have to pay down the total mortgage debt in a single payment. Here also the loan is amortized for the entire loan period. And, if you have lower payments for the first 5 years, then you will have to pay the amortized payment of 25 years in that single payment. Isn’t the repayment plan similar to a fixed rate mortage?

Buy-down mortgage:
It is a home loan which allows you to get an interest rate lower than the available market rate. the only way to get such a low rate is to pay extra points. For example, in a 3/2/1 buydown mortgage, you are offered a rate 3% below the prevailing market rate for the first year, 2% below the market rate for the second year and 1% lower than the same rate for the rest of the loan period.

Adjustable Rate mortgage: If you are quite aware of the mortgage industry, you may try to avoid this option, but give it a thought at times. You may not wish to take a mortgage with an adjustable rate that may vary and go sky high when the short term rates increase. But most adjustable rate mortgages offer an initial rate which is 2% lower than the rate on a fxed rate mortgage. So for the first few years you are free from making large monthly payments. You can pay down other debts or finance other projects which may be pending at the moment. Then if you think that you cannot keep pace with the rising rates, you can switch over to a low rate loan by refinancing. The adjustable rate mortgage allowing you to shift to a fixed rate loan is commonly called a convertible mortgage.

I guess that I have cleared the doubts of many intending to know how they can cope up with high mortgage payments.

With the New Year knocking at the door, most people are thinking of buying a new home or getting debt free by paying off their existing home loans. What I would advice them is, spend some time shopoing around, don’t be in a hurry. After all, its all about getting the home of your dreams or leading a debt free life.