Why It Pays to Learn Your Mortgage Options
It’s surprising how many people really don’t know how a mortgage loan works. They often look at the price of a potential new home and assume that this amount is all they’ll pay for, plus a little bit of interest.
In reality, a mortgage loan is much more complicated than that. By the time you’re done paying on the interest and the principal, you will have paid probably twice the amount of the sale price of the home, if not even more than that. There’s a reason why a mortgage takes 30 years to repay, and the way the interest is figured has a lot to do with it.
Loans that are amortized have the interest figured each payment period, typically monthly, on the outstanding amount of that loan. So for the first month of your mortgage, your interest is calculated on the entire amount of the mortgage. Your payment goes first toward that interest, and then a small amount toward the principal. The second month, your interest is figured on the remaining amount of the principal, which isn’t usually reduced by anything more than a couple of hundred dollars, if that. Your mortgage continues to be paid off in this manner; every month, regardless of how much your payment is, a large part of that goes toward your interest, and the principal gets paid down little by little. Again, there’s a reason why it takes 30 years to pay off this loan.
When you understand a mortgage amortization table and can use it as the tool that it is, you understand why you need to explore all your options when it comes to financing, down payments, points, and so on. For example, points are 1% of your mortgage amount, or $1,000 for every $100,000 of your loan. Many lenders will accept more points up front in exchange for lowering the loan’s interest rate. If you run these different scenarios through an amortization table, you can see if lowering your interest rate by a quarter of a percentage will save you enough over the length of the loan to justify paying that extra one thousand dollars now.
When you use a mortgage calculator or amortization table, and understand how the interest rate is figured every month for the life of the loan, you also then understand the benefit of having the largest down payment possible for your mortgage. By doing so, you are financing less money and therefore paying much less in interest. Some even borrow from their parents or other family members for the down payment; if you do this and pay it back to your parents with interest, that interest amount can be considerably less than the interest you would pay on your bank’s mortgage loan, again, saving you money in the long run.
By really understanding the “ins and outs” of a mortgage and how everything is figured and calculated, you can save yourself a lot of headaches - and a lot of money as well!
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