When it comes to buying a house, most buyers are unable to cover the entire cost of the house at once. So most buyers rely on mortgage loans which are paid back in equated monthly installments (EMIs) over a long period of time (around 20-30 years on average). Mortgage loans significantly reduce the amount that the buyers have to pay at the time of buying, but they do increase the cost overall. However, 20-30 years is a long amount of time and most people’s incomes also increase during that time. So, in essence, the strain on their wealth is reduced considerably. So if you have found your dream house, the next crucial step is determining the price of the mortgage. A good real estate agent can team you up with the right lender who can give you the best price for the mortgage. The price of the mortgage will depend on a lot of factors, but the biggest factor in determining the price of the mortgage is the interest rate.
Before you start calculating the price of your mortgage, it will be helpful to understand all the terms which come along with your mortgage. The principal is the amount of money you borrow from the lender. That principal helps you purchase the house and you will have to start paying the lender back through EMIs. The price of a mortgage isn’t just determined by the principal amount that you have borrowed. Aside from the principal, the lender will also levy an interest rate on the payments. This interest rate is calculated on the principal that is left to pay off. The price of a mortgage is calculated based on the principal and the interest charged on it. The price of a mortgage may vary based on different lenders as they might offer different interest rates for the same principal. The price of a mortgage will include the interest rate and it will eventually add up to a major cost for your home. So while you are finding the right price of your mortgage, consider your financial situation and scope, and calculate how much you will end up paying down the line.
The interest rate which influences the price of a mortgage depends on the following factors:
1. Down Payment
Mortgages cover the total cost of your house (including interest). You can pay off a significant chunk of that amount by making a large (or as large as possible) down payment. A larger down payment reduces the interest rate, thereby reducing the price of the mortgage. For example, if you pay 25% of the house’s cost as down payment, your interest rate (and the price of the mortgage) will be lower than that of someone who has only paid 5% as down payment.
Lenders believe that if buyers can pay a larger sum as down payment, their chances of paying the entire sum back, are higher. This leads to reduced interest rates which lead to a drop in the price of the mortgage.
2. Credit Scores
Your credit scores are a great indication for lenders to know whether they can trust you. Credit scores are calculated based on your credit history and they play a big role in determining your interest rate (and price of the mortgage). Your credit score is affected by your financial accounts, previous loans, credit card usage etc.
Prospective home buyers with higher credit scores will get lower interest rates and will consequently pay a lower price for the mortgage.
3. The Economy
Since the price of a mortgage isn’t a one time payment, you will spend anywhere between 20-30 years paying for it. That’s a long amount of time for any economy to not have any major change. The interest rates can vary depending on the governments, thereby affecting the price of the mortgage. Getting some help from a financial advisor will help you determine the best time to take a mortgage loan which will give you the best price for the mortgage.
Now, you might be wondering about how to get the best interest rate in order to get the best price for your mortgage. The following steps will help:
- Don’t max out your credit cards, pay your loans back and pay all your bills on time. This will enhance your credit score, leading to lower interest rates which will reduce the price of your mortgage.
- Pay a larger sum as down payment.
- Try using adjustable rate mortgages. The interest rates increase with time, but start lower, giving you a more comfortable price for the mortgage to start with.
- Wait for a nation-wide interest rate drop.
Aside from the factors discussed above, some other elements can affect the price of a mortgage as well. There isn’t one specific way to pay back your mortgage. Your agreement with the lender and the type of loan will decide the price of your mortgage. The actual cost of a home will also obviously impact the price of the mortgage. Also consider the impact of renovation costs and property taxes on the price of your mortgage. Taking a long-term loan might give you a lower monthly payment towards the price of the mortgage but the extra interest that you accrue will make the total price of the mortgage significantly higher. Adjustable rate loans also lead to a higher price of the mortgage by increasing interest rates over time.