What factors determine the cost of a mortgage loan? What can you do as a home buyer to keep your mortgage costs and house payments down?
Your finance costs directly affect what you are really paying every month, and how much your next home will really cost you in the long run. Here is a breakdown of the biggest factors that determine the price of a mortgage and some quick tips for getting the best mortgage deal.
Why Get a Mortgage?
Even if you have all cash to buy a home, it still makes sense to take out a mortgage today. There are many reasons for this. The wealthiest and smartest buyers continue to use mortgages even when they have billions in the bank.
Taxes are one of the most obvious reasons. Mortgage costs and interest can be tax deductible. Liability protection is another. If you own your home free and clear, you can be an appealing target for criminals and malicious lawsuits.
With today’s low interest rates, most home buyers can also find better things to do with their money than. They can borrow low and invest their cash for returns that are two or three times higher than that. Those investments will pay off their mortgage loan and home for them.
Agents Compete, You Win.
What is the cost of a mortgage?
It can be really confusing to try to make sense of mortgage ads, rate quotes and loan offers. This is because the true cost can be made up of different lender fees, taxes, points and loan rates.
This has been simplified by regulators by boiling down all of these costs to one number. The APR. The Annual Percentage Rate reveals the true cost of your mortgage loan. Use this one number to compare mortgage offers and instantly determine which is really cheaper or more expensive.
Lender Fees
Mortgage lenders can break down their fees in many ways. Though they can add up quickly.
These can include:
- Broker fees
- Underwriting
- Loan processing
- Closing fees
- Credit report costs
- Application fees
Some refer to these as the ‘junk fees.’ However, to be fair, you do want your loan to be processed, underwritten and closed. You want this to be done fast and well. That costs money to hire great staff. These can be negotiable. The seller may even be asked to contribute to paying these closing costs. What’s important is the overall APR.
Lender Points Versus Loan Rates
Points and rates are a balancing act. They both effectively are interest paid to the lender. Points are simply upfront interest paid to the lender. Ongoing interest as a part of your monthly payment is just spread out over time.
You can ask any lender to pay less or no points in exchange for a higher rate. This will reduce your upfront costs to buy a home and close. Or you can ask for a lower rate in exchange for paying points upfront. This will reduce your long-term monthly payments and total interest.
Again, it all comes down to the APR.
Interest Rates As Part of the Cost of A Mortgage
Many consider interest rates the biggest factor. Yet, there are many smaller factors which actually make up your final interest rate.
The advertised interest rate will be adjusted when you apply to account for these factors. It can give you a lower rate, or make it higher.
Down Payment & Loan To Value
One of the biggest factors is down payment and how much you are borrowing compared to the value of the property. The more you put down, the safer the loan is for the lender, and vice versa. While you can still get 100% financing mortgages, often the more you can put down, the more they will reward you with lower rates.
Credit And the Cost of A Mortgage
Mortgage lenders use your credit report to assess your willingness to pay and likelihood of being able to pay your loan back. Credit score is a part of this. So is the length and depth of your credit history. Other factors they look at are your longest credit lines and highest credit limits.
Payment Shock
Lenders can be concerned when you are making a big jump in payment. If you have never had a house payment over $900, but now want to buy a million dollar home for $5,000 a month, they can be worried about you handling that.
Property Type
Some types of properties are considered riskier than others too. That means higher rates. For example, is this a condo, coop or mixed use property?
Loan Purpose
Are you buying this home to live in yourself? Or will it be a part-time vacation home or investment property? Expect to pay more on investment property loans.
Prepayment Penalties
You will typically have the choice to take a prepayment penalty on your loan for the first few years. If you don’t plan to move or pay off your home this fast it can lower your rate to take a penalty provision in your loan paperwork.
Agents Compete, You Win.
Loan Length
You can typically customize the length of your home loan. Common lengths are 10, 15, 25, and 30 years. The shorter the loan term, the lower the interest usually is. However, since you are committing to paying off your mortgage in a short period, your monthly payments can be significantly higher. Be careful to choose a payment you are truly comfortable with.
Additional Factors
Other factors which can impact your rate and mortgage costs include:
- The loan amount
- The state and zip code you are buying in
- Whether you choose a fixed rate or ARM loan
Summary
Getting the best mortgage deals begins with finding the best fitting lender for your needs and situation. Let your UpNest real estate agent refer you to the ideal lender. One who will give you a good deal, and can close on time. Plus, enjoy a cash rebate on your home purchase at the same time with UpNest, whichis owned by parent companyRealtor.com.
UpNest Home Loans offers fantastic rates for mortgage loans. With guaranteed on-time closing, fast pre-approval, and low down payments, it might be the perfect loan vendor for you.
How much is mortgage on 500K house?
At a 4% fixed interest rate, your monthly mortgage payment on a 30-year mortgage might total$2,387.08 a month, while a 15-year might cost $3,698.44 a month.
How much income do I need for a 200K mortgage?
What income is required for a 200k mortgage? To be approved for a $200,000 mortgage with a minimum down payment of 3.5 percent, you will need an approximate income of$62,000 annually. (This is an estimated example.)
