3 Loan Hidden Costs to Watch Out For
Getting a loan? Whether it’s for a new home, car, or something else, don’t make the mistake of focusing solely on the monthly fee. There are many hidden costs out there that can trip you up and make you spend more than you intended over the long run. Here are three of the most common ones to watch out for.
Discount Points on Home Mortgages
When getting home mortgage, you’ll likely be offered the option to pay “discount points.” This is the option to pay a certain fee up front to lower the interest rate throughout the loan’s lifetime. In a sense, it’s “pre-paid interest,” and on average every 1% of the total loan amount you pay up front will lower the interest rate by about 0.125%.
Here’s the thing about discount points: They’re only beneficial if you break even on the up front payment eventually. That only happens when you hold on to the house long enough. Otherwise, you end up paying more than if you simply kept the interest rate where it was.
The key to getting the most out of home mortgage discount points is to decide ahead of time how long you’ll keep the house. If you’re planning to keep it for 10 years or more, then paying for discount points is a smart move. Otherwise, skip them.
These fees are only supposed to apply when you get your loan from a bank or other lending agency. You don’t need to pay admin/underwriting fees when you get your loan from a broker – simply because they don’t do any underwriting. The lender does.
It pays to know this little bit of trivia, because a fair number of unscrupulous brokers use this technique to pad their bottom line. Don’t be fooled!
Cost of Ownership
Cost of ownership is not a “hidden cost” per se, but it’s definitely unexpected for many individuals. But more importantly, not factoring it in may cost you thousands of dollars in the long run.
Cost of ownership is basically those other costs that come with owning a new asset. For instance, if you’re getting a new home, cost of ownership will include paying property taxes, insurance, furniture, landscaping, etc. If you’re getting a new car, you’ll have to fork over some cash for insurance and the sales tax.
Our advice: If you’re getting a loan that’s right at your financial limit, you’re likely heading for trouble. You may need to dial back a bit, or postpone taking that loan until you’re better prepared for the costs of ownership.
One Final Tip
Even if you’re not planning to take out a loan anytime soon, work on your credit score as early as now. Bring it up to 760 or more, so that any loan you take out in the future will be met with the lowest interest rates. And, perhaps more importantly, working on your credit score trains you to handle your finances better, so you’ll make smarter decisions on money matters moving forward.