Evaluating Mortgage Products Using Total Cost Ratio

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Purelife304
Posts: 221
Joined: Sun Dec 14, 2014 12:17 pm

Evaluating Mortgage Products Using Total Cost Ratio

Post by Purelife304 » Fri Feb 19, 2016 4:59 pm

Hi everyone,

Is there a different (better) way to evaluate multiple mortgage products. I'm finding that many of them have differences that don't give me a lot of confidence that comparing APR's is the way to go (including multiple APRs in the case of some 80/10/10 that I'm looking at).

So what I'm doing is taking the total cost of the loan (Total monthly payment multiplied by the length of the note), adding in closing cost and down payment. Taking that number divided by the the original purchase price.

I'm getting ratios in the 1.8 - 2.0 range when doing this. Now looking at one of these in isolation doesn't tell you much. However the beauty of the ratio (should be) that the lower one is the more financially prudent decision...right?

Now I know there are smart BH out there are going to immediately pick up a ratio in that range is a 30 year mortgage. I'm not requesting perspective on 15 vs 30. Also I know there are a lot of factors such as: Length of time actually staying in the house, early payment, portability, ect. However we have to have some constants for a fair evaluation, so let's just say that everything is equal, and that we will be staying in the house for the entire period of time.

So, is there a different or better way to compare similar mortgage products other than the simple ratio described above?

Thank you all so much!
:sharebeer

4th and Inches
Posts: 145
Joined: Mon Nov 12, 2012 8:53 pm

Re: Evaluating Mortgage Products Using Total Cost Ratio

Post by 4th and Inches » Fri Feb 19, 2016 6:00 pm

The way you are looking at it seems legit to me.

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Kosmo
Posts: 1279
Joined: Wed Sep 05, 2012 11:54 am
Location: Philadelphia

Re: Evaluating Mortgage Products Using Total Cost Ratio

Post by Kosmo » Fri Feb 19, 2016 6:43 pm

What you have is not unreasonable. I'd offer a slight modification to the numerator: subtract of the down payment and then subtract the purchase price. That makes the numerator the cost above the purchase price, which is what you want to minimize.

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