Mortgage Considerations: Interest Rates, Down Payments, and Prepayment Penalties

Interest rates, prepayment penalties, and down payments are issues that will come up when shopping for a mortgage.

If you’re shopping around for a mortgage, you’ll soon discover, if you haven’t already, that the rates you’ve seen online are only current for that day, and sometimes even just that hour. The current mortgage rate, like other interest rates, is constantly changing. When you talk to your broker or lender, be sure to ask about their rate lock policies and confirm that the rate you saw online or on TV is the same rate currently available.

In some cases, prime borrowers, those with good credit scores or high down payments, or both, are offered the option of accepting the prepayment penalty option to lower their interest rate, resulting in lower monthly payments. low. If such an option is extended to you, it is good to consider the importance of the declining payment to your finances over time. Since most prepayment penalties expire after 3-5 years, if you plan to stay on your current loan for more than five years, this could be a viable option! There are two types of prepayment penalties, hard and soft. There is a hefty prepayment penalty to pay if you refinance or sell your home. A soft penalty is due only if you refinance.

When it comes to down payments, one way lenders can offset a down payment of less than 20% of home value is to require you to pay private mortgage insurance (or PMI). Private mortgage insurance is required by most lenders when you pay less than 20 percent of the down payment on your mortgage and carry your entire mortgage balance on a loan worth more than 80% of the home’s value. PMI protects the lender by paying your mortgage in the event that you are unable to do so. The cost of your PMI depends on the amount of the house you bought and the amount of your down payment. You can cancel the insurance once you’ve earned 20 percent of the mortgage through your down payment and subsequent mortgage payments. Plus, you can avoid PMI altogether by taking out a second mortgage to cover the amount you need to borrow above 20% of the home’s value.

While these terms and concepts can be confusing, the good news is that there are many trained and licensed professionals who can help you navigate the options, choices and features of today’s mortgage programs. Make sure you work with someone you feel comfortable with and who doesn’t rush you. Always remember that this is your transaction and you do not need to work with anyone who makes you feel uncomfortable as there are many other professionals ready and willing to work with you.