Buying a new home is a really important decision for almost all of us. But unfortunately, we all have to go through the process of finding the right mortgage before buying our dream house. Finding the right mortgage, however, depends on a number of different factors like the interest rate, mortgage term and your budget.
No matter which mortgage option you choose, you do have to pay back a small amount of your mortgage to the lender every month. This small amount is a portion of the Principal (amount that you have borrowed) and the interest rate for that month. Usually, the lenders use an amortization formula to create your payment schedule that breaks down this monthly mortgage payment into paying off the Principal and the interest rate.
However, the length or duration of your loan mainly determines how much amount you will be paying each month. It is important, therefore, that you choose your mortgage duration wisely. You should be aware of all the possible options like different mortgage durations/terms available, their respective interest rates, payment methods, mortgage types (fixed-rate or adjustable-rate) and so on in order to make a good and informed decision.
How long a Mortgage is borrowed for is essentially known as “Mortgage Duration” or “Mortgage term”. Standard mortgage term in United States is 25 years, but you can get a Mortgage Term that lasts between 6 months to 40 years depending on your financial circumstances. You can also call us at Affiliated Mortgage, a top mortgage lender in rapid city, and amongst top mortgage companies in Fargo.
Mortgage Term Categories
Generally, we divide the Mortgage Terms into two categories
Short Term Mortgage
A Mortgage duration of less than 20 years is referred to as Short-term Mortgage. This mortgage plan makes you pay more money each month but ultimately lets you pay off the mortgage sooner. Getting a short-term mortgage saves you quite a lot of money in the longer run as the interest rate is charged much less on shorter-term mortgages.
Long Term Mortgage
Mortgage term that is greater than 20 years is referred to as long-term Mortgage. This mortgage term costs you less payment per month but you will be paying off a much larger amount in the longer run. In the long-term mortgages, you have to pay comparatively a much greater amount of the interest rate over time.
How to Choose your Home Mortgage Term
Whether you are a first-time home buyer or a refinancing home owner, your Mortgage term should be selected in accordance to your financial plan. Analyze and decide how much mortgage payment you can afford monthly before you start looking for loan options.
Try to look at the broader picture before finalizing your mortgage plan. If you are opting for an adjustable-rate mortgage and the interest rate goes up in future, your short-term mortgage monthly payments will increase more so make sure that you consider such factors before making any final decisions.
Decide for how long you want to pay your mortgage. For example, if you want to own your house before your retirement and you are retiring in 15 years, then you should choose a Mortgage term of 15-years if you can afford it.
Calculating Total Amounts for Different Mortgage Terms
Use Mortgage calculators to find out the overall payment and the monthly mortgage payments of different mortgage terms. It will give you a better idea of your desired mortgage duration and its pros and cons.
Discuss your financial circumstances with your lender so that you can come up with a customized mortgage term that best fits your budget.
It is important that you don’t forget other financial goals while choosing your mortgage term like student-loans, college tuition savings for your kids, credit card payments and your retirement. Paying less interest rate and shortening your mortgage term is a good thing but make sure that you can afford your monthly payments and don’t up in other debts.
The best option would be to completely customize your mortgage term according to your financial plan and monthly income.
Buying a house is quite a big deal for most of us. Most buyers can’t put up enough money to purchase a house upfront. Therefore they rely on a mortgage which they can pay off over a period of time. This process significantly reduces the upfront payment that a buyer has to make, but increases the overall amount. Thus, while buying a house you wouldn’t want to hurry to make any decisions. It is a good practice to search around not just for the house, but also the payment and mortgage options as well.
We all can agree on the fact that the most important factor while buying a house is the interest rate on your mortgage. Typically, you would want to get the lowest interest rate on your mortgage. But what really determines the interest rate? That is a little tricky to find out even for the smartest of the borrowers.
Knowing what factors govern the interest rate on your mortgage will really help you in getting the lowest interest rates. So here is a breakdown for you to know more about the interest rate and how to determine what amount of interest rate you would be paying for the mortgage of your dream house.
The amount of money that you borrow from your lender to pay for your house is called the principal. There is also an additional amount that you have to pay to your lender called interest rate for borrowing the money. This interest rate is a percentage (typically from 4-5 %) of the principal that you have left to pay. Small amounts of this interest rate are added to your monthly mortgage payment. Since this interest rate determines the overall price you have to pay for your house, you must pay special attention to it before making a decision. Saving even a fraction of the percentage of the interest rate will save you thousands of dollars by the end of your mortgage term.
The interest rate on the mortgage fluctuates just like the prices of automobiles or gasoline. So, it is a good practice to study past trends and figure out what time would be best for you to apply for a home loan. This technique will surely make you more informed about the whole procedure and will allow you to have a good conversation with your lender helping you understand your mortgage choices.
What Factors Determine Your Interest Rate
- Down Payment
A down payment is the money you pay upfront for the house. Usually, a larger down payment means a lower interest rate. Often when the buyers put 20% or more upfront payment, they will get a lower interest rate than the buyers who are able to put only a 10-15% upfront payment.
This is because when you pay more money as the down payment for your house, it increases the mortgage lender’s trust in you that you will be able to pay the rest of the money as well. It decreases the risk for lenders. Hence people who put up more upfront payment are rewarded with lower interest rates.
- Credit Score
Lenders will take a look at your credit score to know if they can trust you to let you borrow their money. Generally, buyers with higher credit scores get lower interest rates than the ones who have a lower credit score. Lenders use your credit score information to determine how reliable you will be in paying your monthly mortgage payments.
Credit scores are calculated by the information on your credit history including the loans you took, credit card usage and payment history. Whenever you take out a loan, open a financial account or buy real estate, your credit score is affected.
Your ability to pay back your mortgage affects your overall credit score, so it is very important to find a mortgage plan that you can afford.
- Home Price and Location
One of the factors that affect your mortgage loans is the price of the home you are buying. The interest rate is higher for the house payments that are particularly larger or smaller.
The amount that you need to borrow for your house includes the home price, plus the closing costs, minus the down payment. So, a larger house payment typically results in a greater interest rate.
The house location and the state you live in also affects your home mortgage. If you want to get the accurate results of the interest rate for a particular location, get in touch with one of our lending experts to know more.
- Loan Terms
Another factor that determines your total interest paid to your lender is the loan duration. The term, or duration, of your loan is the time in which you completely pay your mortgage. Generally, short-term loans have lower interest rates as compared to long-term loans.
If you are taking a 30-year fixed rate mortgage plan, then your loan will have lower monthly mortgage installment payments. But it results in a greater overall interest paid to your lender. A 15 or 10 year fixed rate mortgage will ask for higher monthly payments but reduces the interest rate paid.
Adjustable-rate loans may also increase the interest rate over time as the market rate fluctuates. So, it is advised to have a deeper look at these different loan payment options and choose the one that best fits your situation.
Annual Percentage Rate (APR)
APR is an important aspect to consider when finalizing your mortgage plan. It consists of both the mortgage lender controlled costs and third-party costs. It reflects the overall cost of the interest rate, processing costs, lenders fee, documentation costs, origination charges, and discount points.
Understanding all these factors associated with your mortgage is important. It is also important that you compare the loan interest rate and overall plan from different lenders and choose the one that best fits your resources. APR is the best way to compare the costs of loans from different lenders as it accurately reflects the total cost of your mortgage loan.
Tips for Getting a Better Interest Rate
There are a number of ways that you can try to get a better interest rate from your lender. Some of the important ones are:
Pay a higher down payment: This is the most effective way to get lower interest rate on your mortgage. Try to save money for some time and then apply for a mortgage, it will definitely reduce your overall cost for the house.
Compare the different options: It is always a good idea to explore your options while buying a house. Compare different lenders and their mortgage plans.
Improve your credit score: Try to gain the trust of your lender by improving your credit score. Don’t max out your credit card limit, pay your debts and bills. It will definitely help you to get a lower interest rate from your lender.
Keep an eye on the economy: Wait for the interest rates to go down in your area. Observe the past trends and make an informed decision.
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