Obtaining financing can be very expensive, though it doesn’t have to be as expensive as it often is. If a borrower is informed on the purpose of the fees being charged and what the normal amount is for these fees, he can avoid being taken advantage of and paying too much.
Most financing fees are negotiable. The best leverage in negotiating down your lender’s fees is a Good Faith Estimate. This is an estimate that a lender is required to give to a prospective borrower. It is to inform the borrower of all the costs associated with obtaining financing through that particular lender. By obtaining a number of Good Faith Estimates, you can compare to see who the less expensive lenders are. Just because they may charge less doesn’t mean they are the lender that you should go through. More importantly, you want a lender that can provide you with the type of loan you need. However, you can use the lower cost Good Faith Estimates to negotiate with the lender you prefer to use if his fees are more costly. You’ll need to make sure that the Good Faith Estimate contains all the fees that apply to obtaining the financing, not just the lender fees.
To determine what your monthly payment will be for an interest-only loan, you need to know how to calculate simple interest. To compute simple interest, use the following formula:
MIP = P x R/12
MIP = monthly interest payment
P = principal
R = rate
Apply this formula to a $100,000 loan (P) at 10 percent® divided by 12 (months in a year).
MIP = $100,000 x .10 = $10,000 (the annual interest charged) divided by 12
MIP = $833.33
Combined Payment Schedules:
There are loans that combine both the interest-only payment option with a fully amortized payment option. That is, you can take out a loan that requires only interest payments for the first so many years and then converts to a fully amortized loan for the remaining period.
Biweekly Payments:
Biweekly payments are payments that are paid every two weeks. Instead of paying a full month’s payment at one time, biweekly payments divide the monthly obligation in half, due every other week. Because there are 52 weeks in a year, 26 half payments are made, which equals 13 whole payments. This is one more payment made per year than with loans that require one full monthly payment. Due to this extra payment as well as the more frequent deductions to the principal, loans on biweekly schedules can be paid off significantly faster. A 30-year fixed mortgage, paid biweekly, will be paid off in 22 years, saving the borrower 8 years worth of payments. We recommend setting up biweekly payments for every loan that the lender will allow.
Length of Term:
The length of the loan is the time that the terms of the loan require it to be paid off in full. The most common loan periods are 15 or 30 years, but there are numerous other options. You can opt for a term as short as 6 months or as long as the lender will permit, not too often past 40 years.
Short-term Loans:
Short-term loans offer lower interest rates, but your payments are larger due to the short period of time you have to pay off the entire balance. Because you are paying down your principal quickly, the total amount of interest you pay by the end of the term is significantly less than with longer-term loans. Short-term loans are great for building equity more quickly.
Long-term Loans:
A long-term loan is beneficial if the current rates are low and you plan to hold on to your property. Longer-term loans can help to increase your cash flow because the payment is stretched out over a longer period of time, so you pay less each month. The longer the term, the lower your monthly payment, but the longer it takes to increase equity by paying off principal and the more you will ultimately be paying in interest on the property.
Balloon Payments:
You can also combine benefits of both short-term loans and long-term loans with a mortgage that is due in full prior to the length of time its payment schedule is based on. For example, you can take out a loan with payments amortized based on a 30-year term, but agree to pay the loan in full in three years. Your payments are especially low with this type of loan because they are stretched out over a 30-year period and your interest rate is discounted due to the short three-year term. Because the payments over the term will not satisfy the entire amount owed by the end of the term, there will be a large balance due. This is called a balloon payment. The borrower will have to have the means to make this balloon payment at the end of the term. Because most people do not have enough funds sitting in their pockets to make a balloon payment, they usually pay it off with a refinance, or have sold the property before the end of the term. If you plan to sell a property shortly after the time you first take out the loan, a balloon payment is a beneficial way to go. Because of the short term, your interest rate is much lower.
Due-on-Sale Clause:
Whether a loan has a long term or a short term, they almost always have a due-on-sale clause. This clause gives the lender the right to call the loan due if you sell the property that it is collateralized by. If a lender calls a loan due, the borrower usually has only 30 days to pay it in full.
