When you are going to apply for a mortgage or home loan, it is common that you'll try for saving a good amount of money in your pocket. The size of the transaction is a factor which secures the amount of savings. Lender always take this situation as a golden opportunity & lures the people by giving lucrative discounts or in other word “BARGAINS” to sign up for the loan. However, it is very hard to tell that through such a complicated financial decision like home loan, you'll surely getting benefits in terms of “BARGAIN” or not. It depends upon the current circumstances that you'll be able to save or not. It is totally conditional, if it is working for your friend that doesn't mean it will work out for you also.
Here goes some of those bargains which might seems safe but you can't tell those will be as successful for you as others.
1. Lower rate of interest
Getting a lower rate is always a good opportunity for a borrower. But sometimes it also comes with a hidden truth. A low rate might be accompanied with high closing costs and fees. Lenders set a trap for the borrowers by advertising low rates, but along with the process they added high fees & hidden extra costs.
Sometimes theses extra fees are worth to take this loan, but unfortunately some greedy lender are always cunning to manipulate borrowers money. It is wise to compare the ongoing rates with different lenders & then you should proceed to the next level.
2. Loan with no costs
Basically this type of loan is very popular for no closing cost. But you must know details about the loan process before sign up.
The lender will pay the part of closing cost instead of you. In return he will charge you a slighter high interest rate on the loan. This is somehow preferable for the borrowers with low funds as it will meet the requirement of huge money at closing. But this convenience comes up with a hidden truth. If you calculate the total interest amount, you'll find that within few years you'll be paying much more than the closing cost. If you retaining the home & do not opt for refinance option, in the coming 15 or 30 years you are eventually filling the pocket of the lender with much more money than you expected.
You might also ask for a prepayment penalty if you decide to pay off the loan way before time, may be in 3-5 years.
3. 40-year mortgage
Yes, there is something like that. People choose this rate of interest plan just to ensure their payment stabilization. If you have problem to pay 1000 dollars in a month but have no issues of paying 900, this is the mortgage plan for you. 40 year mortgage only elongates the term of the mortgage loan with a minimum drop of monthly payments.
As a matter of fact, you are not saving much out of this process. The compound interest system will surely extract more than you think in this long 40 years period. Apart from that, a 40-year rate will be surely higher than other mortgage term rates. Not only you are paying more interest for a long time, but as per the current rate of interest you will have not more than a 10% reduction on your monthly mortgage payments.
4. Discount points
Lenders include discount points for the borrowers who wants to lower the interest rate. Usually borrowers have the offer to prepay the interest through buying the discount points. The discount points will be worth of 1% of the mortgage loan amount, in return the rate of interest will be lower by one-eighth to one-quarter of a percent.
Discount points are quite popular among the borrower. But it will be beneficial for you only if you have a long loan term to save sufficient amount from the interest which might cover up the cost of your discount points. Short term mortgage loans can not cover up this extra cost & buying points will be a wrong decision.
These are 4 “BARGAINS” you might be getting from your lender. Before making any wrong move, always go for other choices & shuffle various options to pick the best for you.