HERMAN: HEY! What's the big idea? JEN: Oh! I'm sorry, I didn't realize you lived in there HERMAN: I don't

Well, not yet I'm just here for the open house JEN: Are you gonna get it? HERMAN: I'm not sure It kind of depends on the mortgage rates JEN: Ha! Good one! You're not joking

Sorry I didn't realize hermit crabs need mortgages HERMAN: Of course we do! It's the biggest purchase of our lives We usually need a loan to make it happen JEN: If I were you, I would just find the mortgage with the lowest interest rate and go with that

HERMAN: It's not that simple When shopping for a mortgage—or any loan—financial institutions have products with an advertised APR, which stands for Annual Percentage Rate JEN: That's what I mean—just go with the one that has the lowest APR HERMAN: But you can't compare them at face value The APR represents a combination of things: the interest rate, yeah, but also a wide range of additional costs

And, if you're looking at an adjustable-rate mortgage, the APR doesn't even tell you what your maximum interest rate will be! JEN: You've lost me HERMAN: Look, mortgages come in two basic types: fixed rate and adjustable rate (also known as variable rate) In a fixed-rate mortgage, the interest rate is set when you take out the loan and it does not change over time The amount you pay monthly will stay the same for the entire term of your loan In an adjustable-rate mortgage, the interest rate—and therefore your monthly payment—is based on current interest rates in the economy

If the index they're based on goes up, so does your rate, meaning you'll be paying more If the index decreases, so do your payments An adjustable-rate mortgage often has a lower initial interest rate, which is very appealing JEN: Fixed rate, adjustable rate—how do you choose the best one? HERMAN: It's always a trade-off Fixed-rate mortgages are more stable and easy to budget for, but have a higher interest rate overall

Adjustable mortgages have better rates, but are riskier because your rate may increase over time You have to think about your income, your future, how long you plan to live in the home, your financial risk tolerance—and that's on top of weighing different mortgage types, interest rates and amortization schedules! JEN: Gesundheit HERMAN: Huh? No No No, amortization

It's how your loan repayment is broken down into regular installments over a fixed period of time An amortization schedule shows you how much of each payment is going towards interest and how much of it is going towards the principal Jen: Is it that hard to figure out? If your interest rate is 3%, then 3% of your payment goes towards interest Am I right? Your face is telling me I'm not right HERMAN: That 3% is the annual interest rate

If you take the total amount owing on your mortgage, and multiply it by 3%, the result is what you'll pay in interest in the current year, but the monthly payments work a little differently JEN: What? HERMAN: Let's say you take out a 25-year mortgage for $150,000 It's fixed rate, so you're paying 711 bucks a month In your first payment, $375 will go towards interest and only $336 will go towards your outstanding balance So even though you've made a payment of $711, your balance has only decreased by $336

The following month, because your outstanding balance is now $149,664, the interest portion of your monthly payment will also be slightly lower and the principal portion will be slightly higher JEN: So looking at the entire stretch, even though a big chunk of my monthly payments are going towards interest at the start, over time, that kind of flip-flops and by the end, more of my payment is going towards principal than towards interest HERMAN: Now you're getting it! Using this example, after 25 years, you will have made over $213,000 in payments on your $150,000 loan JEN: Woah, that's serious HERMAN: All the more reason to know exactly what you're getting into before signing everything

People get into trouble by committing to mortgages they don't understand It happened to a friend of mine The bank came and took his shell away He had to move into a half-eaten ice cream cone until he could figure things out JEN: That's rough

HERMAN: Mortgages can be an empowering experience or a living shell It all comes down to your understanding of the mortgage products available, honesty regarding your personal finances and clarity about your life situation As for me, this is a little too much home for my budget Time to go house hunting Keep it real!

Source: Youtube


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