The interest rate is a proportion of the total amount loaned, customarily expressed in percentage of the sum. As the duration of most mortgage loans run for many years, even a minor reduction in the interest can correspond to significant savings in the overall repayable amount of the loan over its lifetime. However, it’s not the interest rate that can increase the projected monthly mortgage payment.
There are other factors such as the term of the loan, Private Mortgage Insurance (PMI), loan-to-value (LTV) and any fees charged by the lender and the government in the form of taxes that make up the overall amount of the monthly payments.
A PMI is designed to protect the lenders from losses if borrowers default, and is imposed on the borrowers if the equity is less than 20%, which is applicable both during the refinancing and purchasing of property. It’s a cost that gets added to the principal, interest and tax components and can run into hundreds of dollars, resulting in an increase in the monthly payments.
The LTV is the ratio of a loan to the value of the property being purchased. Expressed in percentage points, it is determined by dividing the amount of the lien by the appraised value of the estate. For example, if an amount of $90,000 is borrowed to purchase a home appraised at $100,000, then the LTV is said to be 90%. There is a cost for a loan with higher LTV, which reduces if the borrower pays a significant as the down payment. So, the higher the LTV, higher is the monthly mortgage payment.
The mortgage term is total time taken to pay off the mortgage in full.
It starts as soon as the loan is approved and funds get used up till the payoff. A longer term such as the 30-year term is characterized by lower payments, even though the borrowers end up paying much more in the form of interest over the total span of the loan.
Besides, even if the borrower can bag the best rate, it may not always turn out to be the best deal if pre-payments during the term are disallowed by the lender. The loan agreement could curtail the borrowers who wish to make extra payments to pay off the loan quickly, instead of compelling them to keep the loan going on for much more time.
If borrowers would like to grab a deal with a low-interest rate that could help them save on early repayment penalties on their existing mortgage, it is important to check how the penalty gets calculated. Otherwise, the borrowers could end up paying much more in early repayment penalties even if the rate is much lower.
Although the period for a change in the interest rate can vary between six months to six years, there isn’t much difference in the rates between a fixed and a variable rate mortgage if the borrowers’ aim is to get a preapproval.
This makes portability another important feature to consider when shopping for a mortgage, irrespective of the rate. Due to various circumstances, most people end up breaking their mortgage term for various reasons such as a refinance or to switch lenders, or perhaps just because of a split up between the co-borrowers.
Breaking a mortgage loan before the current term expires is sure to attract penalties, which could be much higher than the benefits of switching to a low rate, which eventually makes it an insignificant component.
As mortgages come in numerous varieties, each with varying differences in the features, deciding on the mortgage with simply the lowest interest rate is not always advisable. Choosing the services of a professional mortgage consultant can be a good idea. However, the home buyers still need to give the consultants a complete idea of their exact needs, which includes the type of property they wish to buy and the duration they wish to keep it. Consequently, the professionals can advise them on the best possible option from the best possible lender.
- Even though the interest rate is an essential component of the mortgage loan, various other factors contribute to making the overall deal favorable for the borrowers.
- The home buyers should consider all the options available to them before making a choice while hiring a professional consultant can also be helpful.