When you’re shopping for a home you’re not just looking at properties – you also have to look at ways to finance your purchase that will be beneficial to you now and in the long run.
This is where mortgage interest rates come in. Yes, obtaining the lowest rate for any financing is always a priority, but when it comes to mortgages, there are other loan terms that need to be considered based on your financial and personal life. These four valuable insights will help prepare you for finding the right mortgage for your situation.
1. Calculating Monthly Mortgage Payments
As with many loans, you’ll receive a payment schedule that breaks down how much and when you need to pay. With a mortgage, your monthly payments will include both interest and a set amount of the principal loan, but how these amounts are calculated can vary.
This mortgage payment plan is called an amortization schedule and will show how much principal and interest are paid off with each payment, and a long-term view of when you can expect to pay off the loan when following the schedule. When you look at an amortization schedule, you’ll likely find that the earliest payments are mostly interest, while later in the loan’s life you’ll be paying off mostly principal.
2. How Time Affects Your Payments
As you might imagine, the more time you take to pay off your loan, the lower each monthly payment will be. However, as you stretch out the life of your loan, it’s crucial to remember that you will actually end up paying more in the long run.
3. Fixed Rate vs. Adjustable Rate Mortgages
The two main types of loans are fixed rate – where the interest rate stays the same for the life of the loan – and adjustable rate – where the rate is subject to change under certain circumstances. Reasons for obtaining the different types of loans depend on your financial situation, the amount of time you plan on spending in the house, and the larger housing market.
Fixed Rate: When you get a fixed rate, you know what you’ll be paying each month for the entirety of the loan. If you get a 30-year loan, that means you don’t have to worry about fluctuations in federal rates that can affect your monthly payments, and you always know what to prepare for.
Fixed rate mortgages can also be obtained with 10, 15, or 20-year terms. You’ll end up paying more each month for a shorter term loan, but your overall cost will be lower, and you can typically get favorable interest rates.
Adjustable Rate (ARM): Adjustable rate mortgages can be a great option when purchasing a house while interest rates are low, and ARMs are typically offered with initial rates lower than those of a fixed rate. However, unlike a fixed rate, ARMs can change based on rising interest rates, and lenders will calculate your payment based on that changed rate – which means you’ll need to stay diligent about your payments and your finances.
ARMs are best used in situations where the property is not long-term; if you plan on selling in a few years, it’s better for you to take the low-rate ARM. Be sure to check with your lender for caps on interest changes, both in frequency and the amount they can change.
4. Mortgage Interest Tax Deductions
Your interest payments are a tax deduction for your federal taxes, and in many cases, for your state taxes as well. While looking for mortgages and properties, check with your accountant or a tax professional to verify what you can expect when it comes to tax deductions, as this can help relieve your mortgage burden somewhat.
Ready to find out what rates and terms you qualify for? Answer a few questions here, and a home lending expert will contact you with options.