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How Interest Rates Affect Your Mortgage Payment
Applying for a mortgage can be one of the most stressful things in the home buying process. One of the most commonly misunderstood aspects of home buying when it comes to mortgages is how interest rates affect your monthly payments.
The mortgage rate is one of the biggest variables that can affect your monthly mortgage payments. Lower interest rates mean more buying power, but depending on your credit history and purchasing power, they may not mean lower monthly payments.
Understanding Mortgage Structures
Banks typically finance anywhere between 80% and 90% of home purchases. In some cases, government-backed programs will allow for up to 100% mortgage financing. No matter how much your bank is willing to finance, the mortgage is written with the expectation that you will pay back the principal amount with interest.
Interest rates affect the cost of your loan and determine each monthly payment. The interest rate also plays a huge factor in how much you can afford when purchasing a new home. When interest rates are low, your payments are lower and your purchasing power is increased.
Mortgage rates are typically loaned at under two possible types of loans: fixed-rate and adjustable-rate.
In a fixed-rate mortgage, the monthly payment remains the same for the entire life of the loan. The interest rate in fixed-rate mortgages is locked in and does not change. Loans typically have repayment lifespan of 30 years, with shorter terms such as 10, 15, or 20 years also available. Shorter loan terms will have larger monthly payments that are offset by lower interest rates and lower overall cost.
For example, let’s say you are applying for a $200,000 fixed-rate mortgage for 30 years at an annual interest rate of 4.5%. Since the interest rate is fixed, it will remain at 4.5% over the life of the loan. If the annual interest rate is divided monthly, it equals a monthly interest rate of 0.375%. That means that every month you will pay 0.375% of your principal payment.
Your first payment would come out to $1,013, which applies $263 to the principal, the rest of which is your interest payment. Every month, as you pay off more and more of the principal, you will accrue slightly less interest. By the end of your 30-year term, most of the payments you make will be applied to the principal.
In an adjustable-rate mortgage, the monthly payments change over the life of the loan. Because the interest rate is not locked in, the payments can vary month to month. Most adjustable-rate mortgages have a limit or cap on how much the interest rate can fluctuate. When the rate goes up or down, your lender will recalculate your monthly payment so that you make equal payments until the next time the rate is adjusted.
Adjustable interest rates can be extremely attractive for homebuyers who only plan on staying in your new home for a few years. When considering an adjustable-rate mortgage, it is important to consider how often the interest rate will change.
For example, let’s say you are applying for the same $200,000 loan with an adjustable-rate mortgage for 30 years. Under the terms of your adjustable-rate mortgage, you will have an interest rate of 4% for the first five years. After the first five years, the rate is allowed to change by .25% every year, with a cap of 12%. For the first five years, the payments would equal $955 per month. For the next year after that, the payments increase to $980 per month, capping out at $1,005 per month.
Lower Rates Mean More Buying Power
When the interest rates are low, homeownership becomes more affordable. Lower monthly payments mean you can afford more house.
For example, if you buy a house for sale for $300,000 and the interest rate is 7% your payments will roughly be about $2000 per payment. If you buy a home for sale at $300,000 and the interest rate is 3% your payment will be roughly $1200 per payment. That is a substantial savings of about $800 a month, or $9600 a year.
Buying a home is a great investment. Buying a home with a low rate is an even better investment.
Now Is The Time To Buy
Unfortunately, interest rates fluctuate. However, interest rates are currently lower than they have ever been. You can lock in a low rate by purchasing your home now. An experienced realtor from Marhsall Realty can help you figure out exactly how much of your dream home you can afford at the current low-interest rates.
If you are considering buying a home a Marshall Realty real estate agent can help you to find the perfectly priced house to fit into your budget and lifestyle. Now is the time to come off the fence and start searching for your new home while the interest rates are low.
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