The size of your mortgage payment depends on the amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule.
A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.
If interest rates drop significantly and you have a fixed rate loan, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.
You have the possibility to lower your interest rate by means of discount points. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
You can even pay off your loan ahead of schedule. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. You will need to ask your lender for more details.
There are several types of loans you can choose from, depending on your financial status and your needs.
The fixed rate mortgage is a predictable mortgage because the payments remain the same for the life of the loan, and the housing cost remains unaffected by interest rate changes and inflation. There are two types of fixed rate mortgages:
- The 15-year type - The loan is usually made at a lower interest rate. Equity is built faster because early payments pay more principal.
- The 30-year type - In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
The adjustable rate mortgages (ARMS) as their name suggests don't have a fixed rate every month. Payments increase or decrease on a regular schedule with changes in interest rates (increases are subject to limits). You should consider ARMS if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates. ARMS generally offer lower initial interest rates, with lower monthly payments, and may allow you to qualify for a larger loan amount.
There are three types of ARMS:
- The balloon mortgage- Offers very low rates for an initial period of time (usually 5, 7, or 10 years). When this time has elapsed, the balance is clue or refinanced (though not automatically).
- The two-step mortgage- Interest rate adjusts only once and remains the same for the life of the loan.
- ARMS linked to a specific index or margin.