You are viewing the printer-friendly version of Your Mortgage PaymentYour Mortgage PaymentMost people know that each of their monthly mortgage payments includes two parts: a portion that is assigned to repay the principal of the loan (that is, the money you've borrowed) and a portion that is assigned to pay the interest.For most homeowners, there is also a third part of the mortgage payment: the portion that is paid into an escrow account that the lender maintains for you to pay for things like the homeowners hazard insurance, your property taxes and mortgage insurance, if applicable. (This is the element of the monthly payment that can fluctuate even in a fixed-rate mortgage). Points There's more to comparing mortgages than just comparing rates: how points and other terms and conditions affect the bottom line. The total cost of a mortgage involves much more than just the interest payments you make. There are also origination fees, points and other miscellaneous costs. There can be other terms and conditions that may affect the final cost of your mortgage. When you are comparing two different mortgages, be sure that you're taking into account all the factors that can influence your final costs. Discount Points A point is equal to one percent of the total amount of a mortgage. That is, one point on an $80,000 mortgage is $800 (one percent of $80,000). Usually, you will pay any point associated with a mortgage at the time of closing. Most lenders offer mortgages with several combinations of points and interest rates—and generally, the lower the interest rate, the more points you will pay at settlement. Interest rates affect your monthly mortgage payment, while the points affect the amount of cash you must have at the settlement. For example, if a loan with the current market interest rate has two points, a loan with an interest rate that's one-half percent higher than the market rate may have no points. Your choice among the various interest rate/points options will depend on how much cash you have for the closing and settlement. What Rate will You Pay? As you discuss your options among different mortgages, there are other conditions and terms that you should consider. The most important of them is how and when the actual interest rate you will pay is determined. Many lenders will quote a rate and fee at the time you apply for a loan, and then guarantee, or lock, the quote for a specialized time. While this lock protects you from paying more for your mortgage if interest rates increase, it also means you will pay the quoted rate even if interest rates fall. Lock periods run from 10 to 60 days. Longer periods are sometimes available for an additional fee. You will need your lock period to be long enough to get you through closing and settlement. Some lenders give you the option of letting the interest rate for your mortgage float, so the rate can change from the time you apply and the time you close (the rate is usually set after some specific period, but before the actual closing). You may be able to benefit from reduced interest rates through a float if interest rates fall between the time of your application and settlement. But before you choose a float, make certain that you have the resources to cover a higher monthly payment if interest rates should go up. Otherwise, you could be denied your mortgage. Make Sure You Understand You should understand all the terms of the mortgage you select, so you won't be surprised down the road. That's why it's so important to choose a lender who makes you feel comfortable and welcomes your questions. Mortgages are complicated financial transactions, but lenders are experienced in explaining all of their ins and outs to home buyers like you. aa |