Five
Main Factors that Determine the Cost of a Mortgage
Author: Steve Baik
Mortgages are comprised of five main parts that are
essential to
understand clearly before borrowing - the principal,
interest
rate, term of the loan, points, and fees.
The principal is the total amount of money
you borrow. Your down
payment is not included in this figure, so the principal
is
essentially the price you paid when purchasing the house
minus
the down payment.
The interest rate plays a key part in
deciding which mortgage is best for you, since it may
end up costing you more than the house itself. Interest
is the cost of borrowing money, usually
expressed as a preset percentage of the amount borrowed.
Loan interest rates can be fixed, adjustable, or a combination
of
both. The interest rate is the main contributing source
of cost for your mortgage.
The term of the loan refers to the
amount of time it will take you to pay the loan off.
Since you have to pay more interest with longer terms,
it follows logic that lengthier loans are pricier.
Points are optional interest payment
on the loan at the close of the mortgage (ie, when you
have signed loan documents). Each
point equals one percent of the loan amount. Borrowers
often pay
points in order to lower the interest rate which in turn
lowers
the monthly payment. Over the long term, this option may
save
you thousands of dollars.
Last
but not least, fees are amounts of money paid to the
lender
at the time of closing to cover the cost of the mortgage.
These
fees may include escrow fees, title fees, processing
fees,
appraisal fees, document fees, and more. Sometimes lenders
may
charge an origination or application fee. There may
also be fees
associated with your state or loan program.
With the knowledge in the five basics,
you'll be one step closer
to getting the most out of your mortgage.
