Getting Down to The Bottom of Mortgage Loans?

Answer 1

A mortgage loan is an example of an amortization loan. This means that the amount of the loan and its interest are divided into equal monthly payments. Thus a mortgage loan is a method of repayment for large sums of money borrowed.

The Benefits of Making Extra Payments

Because each payment includes the entirety of the monthly interest, while only the remainder of the payment goes toward interest, early payments are largely devoted to paying interest. At first only a little is paid towards the principle each month because the interest on a loan that large amounts to most of the payment. This is why it is wise to make extra payments in the early years of a loan. 100 percent of the extra payment, goes toward paying down the principle and taking months or even years off the term of your loan.

Calculating Maximum Monthly Payments

The calculation of each monthly payment can be done either with a calculator or an amortization table. There are many of these handy mortgage calculators on line, which can help you decide how much you can borrow. Most lending institutions will only allow borrowers to owe 35 percent of their monthly income in payments, though a few may go higher. This includes any monthly payments you already owe. For this reason it is a good idea to pay off all your car payments, and stop maintaining a balance on your credit cards before buying a home.

How Much to Borrow

The process of calculating a borrower's maximum monthly payment and deciding how much money they can borrow based on this amount is called pre-qualifying. Any realtor, loan officer or home builder can pre qualify you for a loan, and help you discover how much you can borrow. You can also do this at home, at least roughly, with a mortgage calculator.

Smaller Loans and Shorter Terms

While it is possible for home buyers to borrow up to 35 percent of their income, it isn't required that a person commit to the maximum amount they can possibly borrow on a 30 year mortgage. Instead there are several wiser options, and ways to save on mortgage payments.

Practice Making Payments

It is a good idea to make regular monthly payments into an account prior to committing to a mortgage to see how difficult it is to make those payments. If it proves to be too hard to make 35 percent payments, try a payment that is one forth of the family's total monthly income. It is often better to choose a less expensive home with more comfortable monthly payments.

Advantages of 15 year loans

Homebuyers can choose to pre-qualify for a 15 year loan term rather than a 30 year loan. Interest rates are generally lower on a 15 year loan, plus each payment of a 15 year loan pays more towards the principle, so that the loan is paid down faster. It is possible to save tens of thousands or even hundreds of thousands of dollars in interest by choosing a 15 year loan over a 30 year loan.

Borrow Less

Buying a less expensive home is another option that can pay off. Bargain shopping in today's market is only sensible, and there are savings to be had. Older homes and fixer uppers are a great idea for those who are handy with tools. Remember though, that new construction may have better insulation and energy efficiency, so when comparing homes, be sure to ask to see utility bills from previous months as a comparison. Smaller homes are also much more energy efficient than larger ones.

Planning For a Mortgage

One of the best ways to think of a mortgage is in conjunction with other payments, and the family budget. Home buyers should clean up their credit score, and pay off all their debts before applying for a loan. Having a good credit score will help them qualify for lower interest rates, while eliminating other payments will not only help them qualify for a larger loan, it will also make those payments easier to make.