Life Events

Life events pose a unique challenge because each is a new or infrequent occurrence for which many people have little or no prior experience.

For many, buying a home is the single largest transaction that we will ever make.

Not only is the mortgage likely to draw off a considerable chunk of our paycheck for up to 30 years, but the care and maintenance of a home is equally consuming.

Here is our advice on this topic.
/ Housing / Buying a Home /

Most homebuyers take out a loan known as a mortgage. Traditionally, a mortgage extends for a term of about 30 years, bearing a fixed rate of interest, and requiring equal monthly payments over its term. Each monthly payment consists of interest plus a repayment of principal. In the early years of a mortgage, the monthly payments consist largely of interest. In the latter years, the monthly payments primarily repay principal.

Today, an extensive array of other options faces the borrower. Rather than being fixed, the interest rate may float, based on a formula tied to some benchmark rate observable in the bond or bank loan markets. If interest rates are near historic lows, locking in a fixed rate normally is the best option. If they are near historic highs, going for a floating rate, in hopes that it may move downward eventually, can be a more attractive alternative.

The term of the loan (the number of years until it is paid off in full) is another variable that requires careful consideration. All else equal, a longer term generally means lower monthly payments. However, the total interest that you will pay over the life of the loan will be higher than if you chose a shorter term.

Beware of prepayment penalties in the mortgage agreement. Some lenders (especially those who have you locked into a relatively high rate) do not want you to pay off the principal of the loan before its term loan has expired. The mortgage agreement may hit you with extra fees if you try to increase your monthly payments (to retire more principal faster) or make any large, lump-sum repayments. You should seek a mortgage that gives you the flexibility to pay it off faster, as you see fit. This includes the ability to enter into a complete refinancing, whereby you can take out a new mortgage at a lower rate, retiring the old higher-rate mortgage in the process.

Mortgage lenders typically charge a bewildering array of fees (points, closing costs, origination fees, etc.) at the time that the loan is set up. These fees can increase your effective cost of borrowing significantly, well beyond what the stated interest rate would imply. Be sure you understand what these fees will be before you enter into negotiating a mortgage with a given lender, lest you waste time on setting up what is bound to be a bad deal for you.

Unless you are very astute financially, you should consider consulting an independent financial adviser in evaluating mortgage terms and conditions. Your projected earning

power, ability to pay, alternative uses for savings that you preserve by keeping a mortgage in force rather than paying it off, tax situation, etc., are all factors in a very complex decision-making process. Getting the right professional advice in this aspect of home buying is well worth it.
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