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Throughout
THE Loan
Hound™ site, a core theme is on educating the general public and
providing the tools necessary to making informed decisions. More
importantly however is the need for consumers to have access to
qualified individuals who can calculate and interpret complex
scenarios. Deciding which home loan option to go with should be
based upon an understanding of some of the core principles addressed
in this site.
The
ideal loan should be meet your financial objectives, and secondly
should be evaluated from an Effective
Cost perspective.
Or simply put, you should choose the loan that will cost you less
money over a specified time frame. This can be accomplished by
calculating the Effective
Rate of
a loan. This calculation can be more involved than calculating an
APR. Both types of analysis will include the added expense of paying
for Mortgage
Insurance.
However, the APR calculation falls short when attempting to isolate
a loan as it pertains to your specific situation (e.g.,
"holding period" of the loan and the elimination of
Mortgage Insurance).
Traditional home loan programs, when the borrower
puts less than 20% down, requires the payment of private mortgage
insurance (PMI). Mortgage insurance protects the lender against loss
should the property revert back to the lender (i.e., foreclosure).
The cost of mortgage insurance however does not
benefit the homeowner (borrower). Nor is there a tax benefit from
paying for mortgage insurance. The actual cost of mortgage insurance
will vary depending upon the company, down payment, and loan type. The
payment of mortgage insurance can add as much as 1 percentage point
(1.00%) to the effective rate of a mortgage.
The good news is that there are ways to avoid
having to pay for mortgage insurance – even with as little as 5%
down. Click
below to view a side-by-side comparison of Effective Rate
calculations on a loan that has mortgage insurance as compared to a
loan that uses two loans to eliminate mortgage insurance.
View
Comparison
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