"Mortgage rates are just one of many factors affecting the total cost of financing a home, and failing to pay attention to the lesser-known expenses that can creep their way into mortgage payments will result in a costlier loan."
#1. Long Term Length
Many home buyers are enticed by the low mortgage payments achieved when opting for a long-term mortgage, which explains the popularity of the 30-year fixed rate mortgage and the existence of even longer-term mortgage options reaching 40 to 50 years in length.
It can be easy for potential homeowners to look only at that low mortgage payment, and not consider that extending a home loan’s term length increases the amount of interest paid on the principal over time. In fact, the longer the mortgage term length, the more interest the borrower will pay in total. While payments are lowered by extending the term, the cost of the loan will be higher overall.
#2. Private Mortgage Insurance
When financing a home with less than a twenty-percent down payment, the borrower is required to purchase private mortgage insurance (PMI), which protects the lender against the possibility default. PMI is generally quite expensive — not to mention notoriously difficult to cancel.
Buying a home often seems more affordable when the borrower doesn’t have to come up with a full 20 percent down payment, but paying PMI in lieu of taking the time to save money for a proper down payment is one way to make a mortgage more costly than necessary.
#3. Overvalued Property
There are several mortgage expenses, besides principal and interest, that are often rolled into monthly payments and can also affect the overall cost -- property taxes are a big one.
Local governments often assess property values just once every three or more years, so for homeowners who have recently experienced a decline in property value (as millions have), it’s possible they are still paying taxes based on a higher, out-of-date valuation.
A surprise to many, refinancing will not always reduce the cost of a mortgage. The same mortgage closing costs a borrower pays on the original loan will be required once again to refinance.
Sometimes the fees associated with refinancing cancel out the savings achieved through a slightly lower interest rate, so it’s important that homeowners do the math prior to refinancing their loans to ensure they are, in fact, saving money after mortgage closing costs have been factored in.
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