How do loan companies offer low payments?

mdeleonFebruary 11, 2007

We're getting our first home and our mortgage will be at about 6.6%. (Not even sure if this is great or not). For about a $320,000 loan, monthly payments are calculated to be over $2500 a month.

Now, how is then that I see these lending tree commercials / ads on the web, that say that you can get a $400,000 loan for only $1334 a month? Boggles my mind but unless interest rates are SUPER low, then I don't see how they do this.

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Those are probably for interest-only, adustable-rate loans, perhaps with a low introductory rate.

    Bookmark   February 11, 2007 at 1:26PM
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You pay now or you pay later. This is just financial sleight of hand to attract you. Repeat after me: There are no charitable lenders out there who will give me a fixed rate loan that will cost me a lot less in the long run. Those super low payments you're seeing could bite you in the butt ultimately. Since this is your first home, you need to stay away from these products. I'm not saying they are all thieves and liars, but they will get their money one way or another.

The can offer these low (initial) payment deals through a variety of means. You could have low payments in the initial stages and higher ones after a year or two. They could offer interest only payments for a while. However, in addition, some offer a "negative amortization loan," which means that the payments are so low they don't even cover all the interest, and each month the amount you owe INCREASES. After a year, your $400,000 loan has grown to a $420,000 loan, and then the monthly payments start to increase as the adjustable rate kicks in.

My advice to you is to get the best deal on a fixed rate loan you can, and then never have to worry anymore. And by the way, I plugged in a $320,000 loan at 6.6% into my calculator and it gives me payments of:

30 year loan: $2403
20 year loan: $2405
15 year loan: $2805

So what kind of loan are you getting quoted on? Are they adding other things into the payment like various kinds of insurance, and real estate taxes, or what?

Here is a link that might be useful: Simple mortgage calculator

    Bookmark   February 11, 2007 at 2:56PM
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Kudzu, I think it is:

30 years loan $2043 (not $2403)
20 year loan $2405

(Hate to have the OP think an extra 2 bucks a month would lop 10 years off!!)

Folks are right in explaining that a loans can be written with 'teaser' rates, variable rates, or interest only in a way that has some owners now "upside down", meaning owing more than the property is worth. The expectation was that property would continue to appreciate wildly and the owner could just refinance later once that equity built up. Really tough situation when things didn't play out that way in some areas. Even selling won't work if the mortgage balance is higher than the property is worth.

So take the 6.6 and know that those ads are selling something you may not want.

    Bookmark   February 11, 2007 at 9:58PM
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Thanks. You are right. As usual my fingers were moving faster than my brain and I transposed the numbers...

    Bookmark   February 12, 2007 at 12:17AM
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If you are new to the mortgage market, shop around, as various ethical lenders charge slightly different rates - to find a legitimate rate that's even part of a percentage point lower means much reduced total payment. By that I mean that the interest rate charged is stable (fixed rate), and that your payments will continue at the same rate throughout the life of the contract. If you agree to a contract where the ethical lender can change the rate after a given period (variable rate), sometimes the current rate is less, for the lender can change the rate if rates in general go higher a few years down the road.

Do some of the people that you know have substantial experience with mortgages? Ask around among your relatives (ones who can keep a confidence), friends, people that you know in social, sport, religious groups, etc.

If you find someone knowledgeable, perhaps ask them to explain how mortgages work, and maybe their advice as you make your plans. Even have them assist in the negotiations with your lender?

As others have said - beware of the agencies that offer drastically lower rates - for often that's just for a short while, then you'll have to pay the actual costs. Or maybe it's interest only - and after five years, you'll still owe as much as you do at the beginning.

Sometimes, as another said, it's less than the actual going rate of interest on that amount of loan - so the principal amount that you owe grows - you're paying less than the interest on that amount of principal, so some of it gets added to the principal, making it grow each month.

When someone offers something for much leess than the regular, going rate - there's usually a catch.

The important trick is to find it.

I don't think that I want to have a contract with some faceless agency in a distant place worth hundreds of thousands, and involving my secure continuation of being able to stay in my home and continui ng to build my ownership of it. Perhaps vulnerableto some surprise interpretations of the contract later that put that ownership in jeopardy, or required me to fork over much bigger bucks than I thought that I'd contracted for. Possibly/likely unable to get out of that contract by paying them off and using another lender.

Are there mortgage brokers in your area, who know the mortgage market well and deal as agent with a number of lenders of various types. Usually they don't charge a fee - are paid by the lender. One of them could explain a lot about how the mortgage market works - and you might choose to have him find one for you, with appropriate terms, at a competitive rate (with no pitfalls).

Quite likely if you sourced information from local lenders, yourself, you couldn't find a better rate than offered by a broker - their expereince with many lenders has taught them where to find the best legitimate terms and rates.

Good wishes as you continue to figure out how to deal with this important issue - it could well cost you multiple thousands to get it wrong. Maybe result in your losing your home, after a number of years and substantial regular payments

ole joyful

    Bookmark   February 12, 2007 at 8:37PM
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