Lower interest rates don't always mean lower payments. Know your loan!

With historically low interest rates dominating the mortgage market news cycle it's easy to get fired up.  But did you know the interest rate on a mortgage loan is just one important component dictating your monthly payment?  A mortgage payment is usually made up of PITI (principal, interest, taxes and insurance) but it can often be more than that.

Let's run through an example. 

Sally wants to buy a house for herself and her family to live in for $350,000.  

Taxes on the property are $1400 a year because this is Colorado, not Illinois or California.

Home owners insurance is $1500 a year.

Let's say Sally takes a VA loan with 0% down.  She finances $358,050 because of the VA's 2.3% funding fee.  Her interest rate with good credit on a day like today would be 2.75% (I'm not a lender, this isn't specific to you or your friends, this is just an example)

So Sally's principal and interest portion is $1461.71 a month, add taxes and insurance and her monthly payment is $1703.71.  Thank you for your service Sally, this is the easiest and cheapest possible option in the short term.  Eventually financing the funding fee will lead to a slightly higher payment than conventional loans as you'll see below, but by that point the VA loan will still be the most cost effective option of these 3.

Now let's say Sally can't get a VA loan because she never served in the military.  She decides to get a conventional loan with only 3% down.  That's right, you don't need 20%!  So Sally finances $339,500 after her downpayment at a slightly higher rate of 3%.  Her principal and interest portion is $1435 a month and then we add the same taxes and insurance BUT ALSO private mortgage insurance of about $198.57.  So Sally's total payment is $1875.71 a month.

The third scenario we will consider is a standard FHA loan with a 3.5% dowpayment.  FHA collects up front mortgage insurance and monthly MI as well.  So if Sally rolls the up front into her loan she finances $343,660 at a rate of 2.75%.  Her principal and interest would be $1403 per month plus the taxes and insurance and of course the monthly mortgage insurance of $239.24.  So the total payment on the FHA loan would be $1884.58.  

Some important things to consider when weighing between the conventional and FHA.  The FHA mortgage insurance is there for the life of the loan and never goes away.  With conventional loans once you pay down 20% of the loan the MI goes away saving you a considerable chunk of the payment.  So Sally's payment would be below $1700 a month once the MI drops off on her conventional loan, making her payments less than the VA and significantly less than the FHA option.

So just know your options and do these breakdowns with your lender.  Don't get all caught up in just interest rate, just because one of your friends got .25% less doesn't mean it actually benefits them and now I hope you can see how that can be.

If you have any questions more specific than the scenario above please feel free to reach out to us!