By Zulika van Heerden

When choosing a mortgage loan most people focus on the interest rate more than on any other factor of the loan.  The lowest interest rate, however, does not always mean you pay less money.  Hidden fees, rising interest rates or prepayment penalties can cost you a fortune over the term of the loan.  Understanding when to recognize a bad mortgage loan may save you a lot of money in the long run.

Variable Rate Mortgages (VRMs)

Variable Rate Mortgages make buying a home easier, especially for first-time homebuyers, but you have to understand what you are agreeing to.  Most VRMs start out with a low introductory interest rate that can climb as interest rates go up. Unless you are prepared to pay a higher payment later on this type of mortgage it can turn out to be dangerous for you.  It is especially difficult for those who can barely afford the loan to begin with. 

You do have some protection against high-rising rates if you have the option of adding a cap on either the interest rate or the payment amount throughout the life of the loan.  However, it is safer and less costly in the long run to choose a fixed rate mortgage loan.  Having a set payment for the life of the loan will be easier on your budget.

Prepayment penalty

Paying off your mortgage loan early can save you thousands of rands in interest but not if there is a prepayment penalty clause in your contract.  Make sure there is no such clause before you sign your loan papers otherwise the bank can charge you enormous fees for paying off your loan.  Most people don’t think they can ever pay off a mortgage loan early at the onset of the loan but your circumstances could change.  It would be a shame to be penalized for trying to save yourself some money.

Interest only loans

An interest only mortgage loan sounds wonderful to some homebuyers because they only have to make a small payment each month for the first 5 to 10 years.  The down side of this is you are only paying the interest and are accruing even more interest on top of that.  You will also not have any equity into the home until you begin paying on the principal.  It’s really like paying rent for your home.  After the introductory period your monthly loan payments will rise significantly.  And since most interest only loans are also VRMs you will find yourself at the mercy of the current interest rate.  If you are not gaining equity in your home from your payment then you should reconsider buying a home until you can afford another type of loan.

Lower interest rates

If you are being offered an extremely low interest rate then you should investigate why.  Ask for a quote  so you can see what the closing costs (initiation & legal fees, insurance etc.) will be.  Many times a lender will add exorbitant closing fees to a loan to make up for the lower interest rate. 

High interest rates

If you know your credit score is good and you are still being quoted higher than normal interest rates then don’t take the first loan that comes your way.  Shop around.  Do your homework and make sure you know what the current prime rate is and the rates of several lenders.  A home mortgage loan is a very long commitment and you don’t want to make that commitment with the wrong lender.

Lenders are in the business of making money so it is up to you to understand what is available to you. Most of us think “bank” when we think mortgage, and one mistake people make is going to their bank and taking the rate the bank gives them.

Even though the bank often gives a discount off the prime rate, most of the time it is not the best rate available. People think that because they are getting a discount that that is the best rate going. In most cases, the rates given by banks are not the best on the market.  Do some legwork first so you can get the best mortgage loan possible.