How Mortgage Interest Rates Impact Your Monthly Payment

How Mortgage Interest Rates Impact Your Monthly Payment

It can be tough determining how much you’ll pay for your mortgage when buying a home. But your agent and lender should be able to tell you the basics so you don’t feel overwhelmed, especially if this is your first time.

In a nutshell, mortgages are financial instruments lenders offer that help you purchase property. You will repay the money and interest to the lender at a rate that was set at the time you obtained the loan. It’s true that an increase in your rate can affect your monthly payment, as well as your ability to repay the loan, by a small change in the rate doesn’t have quite as much impact as you may first assume. It’s true that you will shell out more in interest but you can still afford the home of your dreams.

Understanding Amortization Schedules

Amortization involves paying off a loan with the same payment amount within a set schedule. A mortgage is generally amortized over a span of 30 years, with the same payment amount over the loan’s term. Each payment you make goes towards the interest and principal, but they aren’t spread out there equally.

An amortization schedule will show you exactly how much of your monthly payment will go toward the interest and the remainder that goes toward the principal. Mortgage amortization displays the larger balance of the payment going to interest with the smaller balance, or remainder, going towards principal. As the mortgage gets on in years, more money will start to go towards principal than it will to interest.

How Interest Influences Your Monthly Payment

When obtaining a mortgage, you’re generally locked into that rate for the life of the loan, which means you will have a predictable payment that will never change over the months (unless you refinance in the future).  An increase in interest rates will certainly impact your ability to purchase a home, but not as much as you think. For example, a 1% rate increase will not increase your monthly payment by a huge amount. Most people can still afford their monthly payments even with this type of increase.

When Interest Rates Drop After a Mortgage Has Been Originated

You can refinance your mortgage with a no-cash refinance that still leaves equity in the home. You have a few choices: lower your monthly payments with the lower rate, extend the amount of time you have to repay the loan, or keep your current payment as-is in order to pay off the home sooner.

How Much Does Your FICO Score Influence Mortgage Rates?

It can have a big impact on how much you will pay. If you have a high credit score, you will get a lower interest rate, and if you have a low credit score, you will pay higher. When you pay high interest, this lowers your borrowing power and may involve building home equity more slowly than others do. A low FICO score also restricts the type and quantity of loans that are available to you.

Contact Berkshire Hathaway Home Services Premier Properties

To learn more about what factors affect your mortgage and to inquire about buying and selling, contact Berkshire Hathaway Home Services Premier Properties today at 832-626-4889.

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