The principal and interest are the biggest parts of your monthly mortgage payment. When I started out my first investment in property in 2007, I certainly didn’t imagine where that project property would take me. Now, nearly two decades and over $50,000,000 later, I can tell you few things which will make your investments in real estate easier.
Here I will take a deep dive into how you can avoid money traps while investing in real estate.
What is included in your mortgage payment?
When you break down the mortgage, the principal is how much you borrowed, and the interest is how much you have to pay back to the lender.
To break it down even more, here are the usual costs that make up your mortgage payment.
- Principal: This is how much money you borrowed from the lender.
- Interest is what the lender charges you for letting you borrow money from them. Rates of interest are given in terms of a percentage per year.
- Taxes on real estate: The government taxes your property once a year. If you have an escrow account, your monthly mortgage payment pays for about one-twelfth of your annual tax bill.
- Homeowners insurance: Your policy can cover damage to your home and financial losses caused by things like fire, storms, theft, a tree falling on it, and other things. If you live in a flood zone, you’ll have a second policy, and if you live in natural calamity prone area you might have a third policy. As with property taxes, you pay one-twelfth of your annual insurance premium every month, and your lender or servicer pays the rest when it’s due.
- Mortgage insurance: If your down payment is less than 20% of the home’s price, you’ll probably have to pay mortgage insurance, which is added to your monthly payment.
Figuring out how much you can spend on a house
If you don’t know how much of your income should go toward housing, use the tried-and-true 28/36 percent rule. Most financial advisors agree that people shouldn’t spend more than 28% of their gross income on housing (i.e., their mortgage payment) and no more than 36% of their gross income on total debt, which includes mortgage payments, credit cards, student loans, medical bills, and other bills.
You can use this formula to figure out how much house you can afford. It’s always a good idea to compare rates from different lenders to make sure you get the best deal.
When making a housing budget, it’s important to know how much your monthly house payment will be, since it’s likely to be your biggest recurring cost.
You can fine tune your monthly mortgage payment this way
If you have decided on your budget already, a 30-year fixed-rate mortgage is probably the best choice.
You’ll pay less each month for these loans, but you’ll pay more in interest over the life of the loan.
A 15-year fixed-rate mortgage will save you money on interest if you have room in your budget, but your monthly payment will be higher.
your budget, but your monthly payment will be higher.
What is a 5/6 ARM?
With fixed rates at record lows, most people no longer have adjustable-rate mortgages (ARMs). But if interest rates go up, an ARM could be a good choice for some people. If you only plan to live in your home for a few years, you might want to choose a 5/6 ARM, which has a fixed rate for the first five years and then changes every six months. But pay close attention to how much your monthly mortgage payment can change when the introductory rate is over.
How much should I put down?
Most people think that a 20% down payment is standard, but it’s not required. Many people who borrow money put down as little as 3%.
Do you want to lower your mortgage payment?
If the monthly payment you see on our calculator seems too high, there are some things you can do to lower it. You can change some of these and lower your mortgage:
Pick a loan with a longer repayment period.
Your payment will be less if the term is longer, but you’ll pay more in interest over the life of the loan.
Lessen how much you spend on your house.
When you borrow less, your monthly mortgage payment will be less.
With a 20% down payment or more (or 20% equity in the case of a refinance), you don’t have to pay private mortgage insurance (PMI).
Look around for a lower rate of interest.
But be aware that some very low rates require you to pay points up front.
Put down more money at first.
This is yet another way to make the loan smaller.
How to move forward once you figured out everything
The next step is to get preapproved by a mortgage lender prior to shopping around for a loan to buy home.
Try to get a mortgage.
After a lender checks your job, income, credit, and finances, you’ll know how much you can borrow. You’ll also have a better idea of how much cash you need to bring to the closing table.
Find out more about the rates for each type of loan
There are different types of loans, such as the 30-Year Loan, the 20-Year Loan, the 15-Year Loan, the 10-Year Loan, the FHA Loan, the VA Loan, the ARM Loan, and the Jumbo Loan. Each type of loan has its own purchase rate and refinance rate.
You should plan to pay off your mortgage early.
Check with your bank or lender to see if you can shorten the length of your loan and save more money in the long run by putting more money toward the amount you borrowed. You can make these extra payments once, every month, or every year.
Think about whether an ARM is worth the risk.
It can be tempting to get an adjustable-rate mortgage (ARM) because the interest rate is lower at first. Some borrowers may want an ARM, but others may find that the lower initial interest rate doesn’t lower their monthly payments as much as they thought it would.
You can compare ARM interest rate to the rate for a standard 30-year fixed mortgage. Doing so may confirm your initial hopes about the benefits of an ARM or give you a reality check on whether the possible benefits of an ARM really outweigh the risks.
Learn everything you can about home mortgages.
The price of a home is the amount of money you expect to pay for it.
This is the money you give to the person selling the house. Most of the time, you can avoid paying mortgage insurance if you put at least 20% down.
If you’re getting a mortgage to buy a new home, take the price of the home minus your down payment to get this number. This number is the amount you still owe on your mortgage if you are refinancing.
2. Loan term (years):
This is how long the mortgage you want to get will last. For example, if you want to buy a house, you might choose a 30-year mortgage loan, which is the most common because it lets you make lower monthly payments by spreading out the time it takes to pay off the loan.
On the other hand, a homeowner who is refinancing may choose a loan with a shorter payment period, like 15 years. This is another common name for a mortgage in which the borrower pays less interest overall and saves money. But 15-year mortgages have higher monthly payments than 30-year mortgages, which can be hard on a family’s budget, especially for first-time homebuyers.
3. Interest rate:
Look at the mortgage rate tables for your area to get an idea of how much interest a new mortgage will cost. When you think you know what your rate will be, you can put that number into the calculator. Depending on your overall financial and credit situation, your real rate may be different.
4. Loan start date:
Choose the month, day, and year when your mortgage payments will start.
I hope I covered what matters the most when you consider a bank mortgage. If you still have a question I am more than happy to answer you.
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