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There are several factors that go into determining your qualified mortgage interest rate and how much you will be required to pay each month as you pay down your mortgage loans. Ultimately, your monthly mortgage payment is probably your highest priority. You want to make sure you can afford your payments. You want to avoid falling behind on your mortgage loan. Otherwise, you can risk defaulting on the loan and eventually you will be facing foreclosure.
Fixed-Rate vs. Adjustable-Rate Mortgages
Most mortgage loans are 30-year fixed-rate loans. This means you lock in the lowest possible interest rate at the beginning of the home loan and that will be the same mortgage rate you pay over the life of the loan (30 years). You may qualify for a mortgage loan refinance at some point if the prevailing interest rates are lower or your financial situation improves. Then, you may be able to get a lower mortgage rate and/or shorten the remaining payoff term of the loan.
Some loans offer adjustable-rate mortgage (ARM) financing. This means that the interest rate is recalculated periodically and automatically adjusted from year to year. This can be an appealing option if the current mortgage rates are high. However, you are taking the risk that they could go even higher and increase your monthly mortgage payments. Or, if the average rates come down, so will your monthly mortgage payments. An ARM is a bit more of a gamble, but it can pay off in certain market conditions. Talk with your mortgage lender to see which solution is right for you.
For the purpose of this article, we will focus on traditional 30-year fixed-rate mortgage loans as those are always the most common type of home loan.
Mortgage Rates and Monthly Payment Amounts
Getting back to the title question, how does your mortgage rate affect your monthly mortgage payments? The answer here is quite a lot, in fact. It will play a significant role in determining how much you owe to the bank or lender each month when paying down your mortgage loan. It is not the only factor, but it is a big factor for sure.
The interest rate you qualify for when applying for a mortgage loan will directly affect your monthly mortgage payments. A half-point difference in percentage could mean the difference of hundreds of dollars each month, depending on the size of the loan. Of course, the mortgage rate will have a larger impact on bigger mortgage loans. A half-point difference on a loan for a $1 million dollar home in a nice part of Atlanta will affect monthly mortgage payment amounts more than a half-point difference on a $300,000 home loan for a suburban condo buyer.
As a home buyer, you will want to take the recommended steps to secure the lowest possible mortgage rate. Your first priority will be getting your finances in order before you apply for a home loan. Pay down existing debts, make sure you have a steady and consistent source of income/employment, and work to improve your credit score (FICO score). You can also try to save up for a larger down payment. All of these factors will help you qualify for a lower mortgage rate when it is time to buy your home.
Additional Factors Affecting Your Monthly Mortgage Payments
It is also important to understand that the mortgage rate is not the only thing that will affect your monthly mortgage payments. Here are a few other factors to consider:
Naturally, the amount you are borrowing will greatly impact your monthly mortgage payments. A larger principal amount for the loan will mean higher base payments. Again, the mortgage rate will have even more meaning when you are applying for a higher loan amount.
If you are paying less than 20% of your loan amount as a down payment, you will likely be subject to additional mortgage insurance (also known as PMI or MIP). This will be a required monthly fee until you have reached the predetermined principal payoff amount (which is usually at least 20% of the loan value).
Some home buyers may opt to roll certain closing costs into their home loan. This will add principal to your loan amount and thus will increase your monthly mortgage payments. Some common closing costs include home appraisal fees, real estate attorney fees, loan origination fees and other fees that may be required by the borrower.
Your mortgage loan may also include specific escrow accounts where you pay off your property taxes, homeowners insurance and other fees. This is not a necessity in most home loan cases. However, some home buyers may prefer to include these as part of their monthly mortgage payments as they are easier to pay off incrementally rather than one big bill per year. These escrow payments will not affect your mortgage principal amount in any way. They are just separate payments attached to your mortgage payments to make the monthly total higher.
There are other fees and taxes that may be attached to your home loan. Make sure to get a full and accurate monthly payment estimate when applying for your mortgage. You will want to know exactly how much you have to pay each month with everything included. Though you may qualify for a larger loan amount, you may not want to borrow that much. Figure out what your monthly mortgage payments will be with all expenses included. That’s how you determine how much you can truly afford when buying a home.
If you are buying a home in the Atlanta area, contact Moreira Team | MortgageRight today. Let us help you get pre-approved for your mortgage loan and lock in the lowest possible mortgage rate. We can show you what your estimated monthly payments will be and explore different lending solutions based on your financial situation. Get started now!