Mortgage Rates Affect How Much You Can Borrow For A Mortgage
You dont have to be a math prodigy to work out that the less interest you have to pay on a loan, the more you can afford to borrow.
But lets look at some examples in action. Were making all the same assumptions we used in our earlier examples, except for your monthly inescapable expenses and the interest rates you qualify for.
All weve done is use our mortgage calculator to come up with the figures. And you can do that to match your own circumstances just as easily as we have.
Pretend You Refinanced Without Actually Refinancing
You may decide that doing a formal refinance is not appropriate for you. However, that doesnt mean that you cant ACT like you refinanced. Simply pretend that your monthly mortgage bill has increased and pay more toward the loans principal.
For example, suppose your monthly payment is $1000. Pretend that you refinanced and your payment is now $1400. Applying that extra $400 each month to principal reduction is equivalent to making several more mortgage payments each year.
Because this cash is applied directly to the principal, you are taking big chunks out of the amount that interest is based on.
Pro tip: Make sure that extra $400 goes towards principal and is not counted as an additional payment towards interest and principal.
Understanding Principal Balance
Before you start making extra principal payments, contact your lender and identify the terms of your loan. There are a few mortgage companies that will not allow you to pay extra towards the principal whenever you want.
Avoid Prepayment Penalties
Some contracts only allow you to make extra payments at a specific interval. If you make the extra payment outside of the allowed times, you may be charged a prepayment penalty. Be sure your lender will accept extra payments before you write that check.
Should I Pay Off My Mortgage Early Pros And Cons
Many financial planners have clients that ask, Should I focus on paying off my mortgage early? The reason many people hang on to their mortgage and make the monthly payment for thirty years is they think they need the mortgage interest deduction as a write off .
The other reason they give is that they cannot possibly squeeze another dime out of their budget to pay it off early, even if they wanted to. If you think about it, these reasons are actually excuses. Mathematically, wouldnt you be better off with no mortgage rather than a tax write-off of the interest-only? The more years you pay, the less interest there is, so the smaller your deduction.
Also, EVERYONE, including me, can squeeze a few extra dollars out of their budget, and every little bit helps.
Recommended Reading: Usaa Refinance Auto Loan Calculator
Your Mortgage Application Doesnt Have To Be Perfect
Sure, youll have the biggest home buying budget if you have no other debts and a large salary.
But those things arent required. As a home buyer, its all about starting where you are now.
Figure out what makes sense for you based on your own salary and needs, rather than aiming for a budget based on a rule of thumb.
Many people find that when they approach it this way, home buying is more attainable than they ever thought possible.
Popular Articles
Principal And Interest Of A Mortgage
A typical loan repayment consists of two parts, the principal and the interest. The principal is the amount borrowed, while the interest is the lender’s charge to borrow the money. This interest charge is typically a percentage of the outstanding principal. A typical amortization schedule of a mortgage loan will contain both interest and principal.
Each payment will cover the interest first, with the remaining portion allocated to the principal. Since the outstanding balance on the total principal requires higher interest charges, a more significant part of the payment will go toward interest at first. However, as the outstanding principal declines, interest costs will subsequently fall. Thus, with each successive payment, the portion allocated to interest falls while the amount of principal paid rises.
The Mortgage Payoff Calculator and the accompanying Amortization Table illustrate this precisely. Once the user inputs the required information, the Mortgage Payoff Calculator will calculate the pertinent data.
Aside from selling the home to pay off the mortgage, some borrowers may want to pay off their mortgage earlier to save on interest. Outlined below are a few strategies that can be employed to pay off the mortgage early.:
You May Like: What Credit Score Is Needed For Usaa Auto Loan
Mortgages Fixed Rate And Adjustable Rate Formats
There are two primary mortgage formats in the United States, the fixed-rate and the adjustable-rate . Fixed-rate mortgages remain the most common, and most popular, mortgage product for US home buyers. With a fixed-rate mortgage, interest rates are set during the loan’s origination and they remain constant throughout the life of the loan. Fixed-rate mortgages are offered at a variety of terms, Fixed-rate mortgages are offered at a variety of terms, typically in 15, 20 or 30 year formats, with a 30 year fixed-rate mortgage be the most popular throughout the US. The main advantage of these types of loans is that buyers are protected from any sudden and unexpected increases in interest rates while they hold the mortgage. Monthly payments remain predictable, as does the total cost of the loan itself.
Adjustable-rate, also known as variable-rate, mortgages may not be the most popular format in the US, but they are the prevailing home loan product in many other countries. Indeed, in the United Kingdom, Australia, and Canada they are the most common type of home loans, and in these countries it is extremely unusual to find a fixed-rate rate mortgage product. This is because the basic structure of the mortgage lending industry in most countries doesn’t support long term lending. With the notable exceptions of Germany and Austria, in most European countries the predominant mortgage format remains the ARM or variable-rate loan.
Standard And Collateral Charges
A mortgage is a loan secured by property, such as a home. When you take out a mortgage, the lender registers a charge on your property. The type of charge determines which loans your lender allows you to secure against your property.
Standard charge
A standard charge only secures the mortgage. It doesnt secure any other loans you may have with your lender, such as a line of credit. The charge is registered for the actual amount of your mortgage.
Collateral charge
With a collateral charge mortgage, you can secure multiple loans with your lender. This includes a mortgage and a line of credit.
The charge can be registered for an amount that is higher than your actual mortgage. This allows you to borrow additional funds on top of your original mortgage in the future. You avoid paying fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow.
Also Check: Usaa Auto Loan Rates Used Cars
Getting Around The Five Year Rule
Of course, if you could build equity more quickly – thereby helping to negate the higher month-to-month cost of owning vs. renting – it could be financially worthwhile to trade out of a home much sooner, say after three years.
In a rising home market, you may find that home values are increasing fast enough that the appreciation alone is enough to exceed the expense of interest payments and closing costs in just two or three years. That’s what happened to a lot of people in the early 2000s and why many were “flipping” their houses every couple of years to take advantage of the gain.
Of course, that isn’t a reliable way of building value – as experience has shown. While historical trends are that homes do tend to rise in value over time, it isn’t consistent enough to be able to depend on it over just a five-year period.
You could build equity more quickly by simply paying an additional sum on top of your regular mortgage payment each month – $50, $100, $200, whatever. But because this money is coming out of your pocket and could have just as easily been deposited in a savings account if you were renting, it really doesn’t have any effect on the Five Year Rule.
Example: Cut Your Interest Payments By $29000 With A Refi
Your previous home buying or refinance process wasnt easy. There was a lot of red tape involved, and the closing costs were expensive. So why would you want to repeat all those steps again?
There are plenty of good reasons.
First, you may be able to save a lot of money. In 2020 and 2021, mortgage rates reached their lowest levels in history meaning thousands of dollars in savings for many. Current rates are still at historic lows.
Say you recently closed on a $250,000 mortgage for 30 years at a 4.5% fixed rate.
Assume you now have the opportunity to refinance at 3.75%, resetting the 30 years.
Youll save close to $100 a month on your monthly mortgage payments. Add that up over 30 years, and you will have paid almost $29,000 less in interest. And the lower rates go, the bigger savings you could see.
If you count on staying put for a while, this strategy is usually worth it.
It makes sense to refinance if the interest payment savings make up for all the related costs and fees associated with closing a new mortgage, says Cororaton.
Recommended Reading: Does Va Loan Work For Manufactured Homes
Make Extra Principal Payments Monthly
There are pros and cons to choosing to make extra principal payments instead of refinancing.
Positives include:
- Save on interest by reducing principal and years paid on loan
- No additional closing costs for refinancing
Negatives include:
- No savings on interest rate
- Need for self-discipline
- Eliminates fewer years on total mortgage when compared to a 15-year refinance
Overall, making additional principal payments can be a win-win if you are disciplined enough to make the additional payments on a regular basis. If you can pay an extra $100 per month towards principal on a $100,000, 30-year mortgage, the average time shaved from the loan is nine years.
Ways To Pay Down Your Mortgage Principal Faster
In the excitement of buying a home, many people think more about how much house that they can afford with their monthly budget instead of how long it takes to pay off a 30-year mortgage.
The good news is that a 30-year mortgage does not need to last for the full 30 years. It is possible to pay down a mortgage painlessly in much less time. It does take forethought, dedication, and a concrete plan to see results, but simple changes now can take years off a mortgage.
Here are five ways that you can pay down your mortgage principal faster.
Recommended Reading: What Credit Score Is Needed For Usaa Auto Loan
What Other Mortgage Terms Are Available
- Other mortgage terms include 10-, 20-, 25-, and 40-year terms
- But not all banks and lenders offer these options
- You may also be able to choose your own home loan term
- Where you can pick any loan term you like between a certain range
Mortgage terms dont stop at 30 and 15. There are plenty of other options, including 10-year, 20-year, 25-year, 40-year, and even five-year terms.
Yep, you can pay your mortgage off in just 10 years or stretch it out to 40 years if you need a little more time.
The longest mortgage term Ive seen was 50 years, but that was gimmicky and short lived, for good reason.
If 15 years is too quick, but 30 is too long, theres always the 20-year mortgage.
There are even mortgages amortized over 40 years that are due in 30, so the options are endless really.
The five-year term refers to balloon mortgages where the loan is due in full after just five years.
Of course, theyre set up so borrowers refinance/sell at that time, and theyre amortized over 30-years, making them affordable on a monthly basis.
The shortest mortgage term where the loan is actually paid off in full would likely be the 10-year fixed mortgage.
As the name indicates, it has an interest rate that doesnt change and is paid off in just a decade.
While it might be offered by certain lenders, it could well be out of reach for most homeowners because mortgage payments will be roughly double that of a 30-year loan.
How Monthly Payments Can Change With Different Loan Terms
Using our loan amount calculator can allow you to enter your home value, remaining mortgage balance, and credit score to see how much your equity and credit allow you to borrow. Additionally, we provide a simple way to see how much your monthly payments would be for a home equity loan from Discover, with breakdowns for the different term lengths of 10, 15, 20, and 30 years.
In general, shorter terms mean higher monthly payments and longer terms will allow for lower monthly payments shorter terms will accrue less interest charges against the loan than longer terms: meaning that longer term loans will ultimately cost you more.
While the interest rate may stay consistent whether you select a short or long repayment term, spreading the loan out over a longer term will increase the overall amount of interest you will pay against the loan. For example, if you are taking out a $50,000 home equity loan at 4.99% interest, a 10-year repayment term will cost you $530 each month for total payments of $63,600 for the life of the loan. The same amount and interest rate with a 30-year repayment schedule will cost only $268 each month, but you will pay $96,480 against the loan when you complete payments.
Your credit and available equity will typically determine your interest rate offers from lenders, but you will have the ability to select the term of the repayment period. The more you can afford to pay each month, the cheaper your loan will be in the long run.
Read Also: What Credit Score Is Needed For Usaa Auto Loan
Calculating Your Actual Monthly Payment
Your monthly mortgage payment depends on your interest rate, loan amount, and loan term. Before going under contract on a home, spend some time with a mortgage calculator, experimenting with different mortgage terms.
If you cant afford the payment on a 10-year or 15-year mortgage, consider going with a 20-year or 30-year term which will offer lower monthly payments.
As you consider these estimates, remember that your actual monthly payment will likely be higher than the calculator shows because of extra charges such as:
- Homeowners insurance premiums: Most loan servicers let you pro-rate your annual homeowners insurance premiums into 12 installments added to your mortgage payment. This money goes into escrow and will be ready when your homeowners policy comes due.
- Local property taxes: Loan servicers will also collect your annual city or county property taxes as monthly installments paid into escrow.
- Mortgage insurance premiums: Depending on your loan type and down payment size, you may need to buy mortgage insurance which provides protection for your lender in case you default on the loan.
- Other fees: Its possible to add homeowners association dues or home warranty premiums onto your monthly mortgage payment.
Its common for homeowners to pay several hundred dollars in taxes, premiums, and fees each month in addition to the actual mortgage payment which goes onto the real estate debt.
When Is A Refinance Worth It
Whats most important to focus on is, what are the monthly and lifetime savings of the loan? What are the costs? And how long will it take you to recover those costs with the savings youll earn? says Ralph DiBugnara, president of Home Qualified.
Gay Cororaton, Senior Economist for the National Association of Realtors, says best candidates for refinancing are:
- Those with high mortgage rates relative to a new lower rate
- Those who intend to stay for a long time in their home
- Those who have the cash ready to pay for closing costs
Alternatively, many lenders can roll the closing costs into your mortgage principal or cover them in the form of a higher interest rate so you dont have to pay upfront.
That higher interest rate may still be far below your current rate, and it comes with no closing costs from your pocket or added to the loan balance.
Dropping your rate with no associated costs makesthe decision to refinance an easy one.
Recommended Reading: Texas Fha Loan Limits
Rate Terms And Repayment Of A Home Equity Line Of Credit
A home equity line of credit is usually tied to a variable interest rate. This means the rate can go up or down over the term of the loan because it is linked to an independent benchmark or index, like the U.S. Prime Rate. As this article was being written, the U.S. Prime Rate was 3.5 percent. As this rate changes, your interest rate will change too, and it is not uncommon for lenders to add a few percentage points to your interest rate in the form of a margin. Keep in mind, the better your credit score, the better interest rate options will be available to you.
The term of a home equity line of credit can be as little as 5 or as much as 10 years. All borrowed funds are secured by the value of the equity in your home. This makes a home equity line of credit another good option for making large purchases. At the end of your loan term, you can no longer withdraw funds and the balance of the loan becomes due.
