A mortgage payment is based on various factors. A lower interest rate alone won’t make it affordable and variables such as the loan term and mortgage insurance are also important. At times even when you get a good rate, you’re not allowed any pre-payments during the term. It might be suitable for those who can make extra payments but could be a favorable deal for first-time buyers with limited cash flow. If you have the ability to make extra payments, then a higher frequency of payments can be ideal. On the other hand, a lower-rate mortgage with no pre-payment facility could take longer to pay off.
There are other factors such as the term of the loan, Private Mortgage Insurance, loan-to-value ratio along with the number of fees charged by the lender and the government in the form of taxes that make up the overall amount of the monthly payments. The amount borrowed, Loan-to-value ratio, the Credit score of the applicant and other added costs such as Private Mortgage insurance are some of the other factors that need to be considered to get a worthy deal.
The interest rate, to start with, is always a proportion of the total amount loaned. Expressed in percentage, it can be either fixed or variable depending on the type of mortgage you go in for. Usually, the duration of loan run into many years. Taking this into consideration, a minor reduction in interest can be beneficial. It can lead to considerable savings in the overall repayable amount. However, the projected monthly mortgage payment is subject to many factors, and the increase in the interest rate is only one of them.
The Private Mortgage insurance is needed to protect the lenders from losses if and when the borrower defaults. The cost is imposed on the borrowers if the equity of the estate is less than 20%. It is applicable during the refinancing and purchasing of a property and can increase the monthly payments.
The loan-to-value ratio is the ratio of a loan to the value of the property being purchased. Calculated in percentage points, it is the ratio of the amount of the total lien divided by the appraised value of the estate. For instance, if an amount of Ninety thousand dollars is borrowed to purchase a home estimated at Hundred-thousand dollars, then the loan-to-value ratio would be 90%. Apparently, there is a cost for a mortgage loan with higher LTV. However, the ratio reduces if the borrower pays a higher amount as the down payment to purchase the estate. Thus, the higher the LTV, the more the borrowers have to pay as the monthly mortgage payment.
A credit score of the borrower is another crucial factor based on which the mortgage rate is calculated. The score determines the creditworthiness of the applicants and is usually the first thing referred by lending institutions.
While many have no idea on how to check their score, there are many ways to control it. People with low credit score can gradually improve it. There are various scoring models which are used in the market. The most popular of these measurements is the FICO score, a proprietary tool developed by Fair Isaac Corporation, as a majority of lending companies use it to determine the amount of risk involved in your loan application.
Individuals with a score lesser than 650, are usually considered to fall on the lower side of creditability spectrum and may have to shell out high rates of interest on their credit cards or mortgage loans if they qualify for it in the first place. On the other hand, anything above 740 is considered excellent, prompting the banks and lending institutions to offer the best rates to the people with such a score.
So, when applying for a mortgage loan, you need to take each of these into consideration to bag the best deal.