First some Mortgage Philosophy...

I want to talk about house mortgages, not home mortgages, and there's a reason for that. Homes satisfy your heart and spirit. Houses are made of brick, stone, and wood. They keep you dry and warm and are "a necessary part of life" but they are not part of your soul. It gets awkward if you mix the two.

Mortgages defer payment so that you can do something now instead of later. They are all about when. If you're not worried about the when of house ownership, then you probably don't want a mortgage. Getting a "tax break" is no reason to take out a mortgage! Any time you'd like to pay someone $1 to get back 25 cents, please call me first. I would be happy to make that deal with you.

If you take out a mortgage...

The seller gets their full bulk of cash with no more ties to the property. You, the buyer, either can't give them that big of a bulk of cash, or have chosen you don't want to give them a big bulk of cash that you could give them. Mortgages are given from a third party who doesn't give a hoot about the property. They provide the big chunk of cash for you, in exchange for a promise or commitment of your future life. To handle the risk that you might not be around to pay them back, they have service fees associated with them.

There are only two ways for a mortgage to "cost" you money. Ignore the underlying cash price, or principle, of the loan for the house or car or whatever. For example, if you're paying $100,000 for something, that's not a mortage cost. All the money paid above the $100,000 cash price is a mortage cost. Putting this aside, along with any exotic or bizarre mortgage arrangements that are non-normal, and there are only two ways a mortgage company gets money from you: 1) cash up front, or 2) interest payments. The names companies use to hide these two costs is amazingly diverse. I've tried to document some in the MortgageLineItemsCosts page.

The three factors that you must know to evaluate if a mortgage is a good deal are 1) interest rate, 2) up front costs, and 3) duration. What's comforting is that these are all you need to know to evaluate a mortage. They seem daunting at first, but if you truly understand this triangle of costs, you pretty much have a handle on all the ways they can reach out and touch you.

By interest rate, I don't just mean a number. Some people shop only this number. Certainly many advertising campaigns are built around it. Usually you can assume this is compounded monthly, and quoted as an Annual Percent Interest. But of course, ask. Also, it could be fixed or could be variable or could be fixed for a while, then variable, or any combination thereof.

Up front costs come under many names and about 1/3 of them you won't know about until you've already signed paper committing to the loan — unless you ask, press for an answer, insist that you get pre-signed copies, and then hold them to the numbers at the closing. Will you walk from a house deal because of a new $100 fee? Probably not. They know you won't, so chances are good these "oops I forgot" fees will show up. They have every time I've closed a mortgage. Often, I've gotten them back. Good companies honor the quote with a call to the home office. Others took a campaign with the Better Business Bureau. Some I never got back. The most disgusting excuse I heard was, "Well, I just type everything in the computer, and it prints out the forms, so that's what the fees are, now." Computers are a tool, not financial gods. Grow up and do it by hand if you have to!!

Duration is usually fixed at some length of time. Say 30 years. Or 15 years. What's interesting is that duration is what immediately affects your MortgageMonthlyPayment?. Each month you get interest charged to you, and then you make a payment that is a little bit more than the interest. So.. the amount you owe goes down. How much it goes down each time you pay sets how many months you have to pay on the loan. If instead, you do the math exercise backwards (set the number of months first), then the amount extra you have to pay will get larger or smaller based on what number of months you put in. One caveat: the above discussion is true, but don't assume the extra amount each month is the same each month.

In fact, highlighting this difference is one of the non-standard loan arrangments I've seen. Almost all loans are designed to keep the monthly payments the same over the life of the loan. At the beginning most of the payment is interest. Toward the end (when the capital amount left over generating interest is lower), most of the payment is not interest. You could design a loan where the amount paid over and above the interest stays the same. This would give lower and lower payments each month you pay.


Created by brian. Last Modification: Thursday 23 of April, 2009 23:19:25 CDT by brian.