Questions About Mortgages
Mortgages represent a considerable financial commitment. The average individual will be paying back their mortgage for thirty years of their life, and even the shortest loans represent a financial commitment of at least a decade.
As such, mortgages are not something to take lightly. Before you decided whether or not you are ready for a mortgage and your new home, consider these important questions and make sure you have carefully considered all aspects of mortgages before committing to a loan.
Commonly Asked Question 1: What is Considered an Acceptable Down Payment?
The more of a down payment you can make on your new home, the lower your mortgage will be. Some lenders require large down payments – especially if you have a questionable credit score, while other lenders require a more standard down payment. Almost no reputable mortgage agencies will allow you to purchase a new home without some type of down payment to show financial means and commitment.
The minimum down payment for most lenders when you have good credit is going to be 5% of the total purchase cost. A 1 million dollar home will require a $50,000 down payment, while a 100,000 dollar condo will require as little as $5,000. It should be noted, however, that there are additional costs to purchasing a home that are not included in the down payment. Some lenders will require you to prepay insurance, while other lenders will require you to pay all of the closing costs of the loan right from the beginning. It should also be noted that the average down payment on a home is roughly 20%, to account for credit score problems and to lower risk (interest rates may drop if you can commit more money down).
If you are planning your down payment, it is best to make sure that you are prepared for all of these costs, with additional money in the bank to ensure that the down payment doesn’t sap your savings. A home is a great investment and a mortgage a valuable tool, but due to the importance of making each payment on time, you must make sure you have additional money in the bank after all fees have been taken.
Commonly Asked Question 2: What Are Average Monthly Payments for a Mortgage?
Because mortgages have so many different lending options, average fees are difficult to calculate. However, using the simplest type of mortgage available (the fixed rate mortgage) it is possible to estimate what monthly fees will be for both an average 30 year mortgage and 15 year mortgage, and it can be assumed that a loan with varying interest rates will still hover around these monthly payment tags.
- 30 Year Mortgage – For every $100,000 on the loan, at an estimated interest rate of 5%, the average payment will be $536.82. You can multiply that number by the amount of your mortgage in relation to $100,000. For example, a 250,000 mortgage will require monthly payments of $1342.05 (2.5 x 536.82). For every extra percentage in your interest rate, the cost of the monthly payments per 100k is approximately$50.
- 15 Year Mortgage – A 15 year mortgage seeks to pay off interest sooner, which reduces the total dollar value at the end of the loan, but also increases your monthly payments. For every $100,000 of the home loan, you will have a monthly payment of $790.79 with a 5% interest rate.
It should be noted, however, that this does not include additional fees like property taxes. But as far as monthly payments are concerned, the above examples are roughly true for all types of loans, with the numbers varying by the year of the loan and the interest rates.
Commonly Asked Question 3: How Much Does My Home Cost With a Mortgage?
Because mortgages charge interest, the total amount you are paying for a home is more than its price. When interest accumulates, you are ultimately paying for the home cost plus the cost of interest over the course of the loan.
The best way to view this is with numbers. Using the above example for a $100,000 dollar home:
- For a 30 year mortgage at an interest rate of 5%, each monthly payment is approximately $537.
- Over the 360 months of the loan, the total amount paid will be $193,320.
- So the cost of a $100,000 home if the entire loan was a mortgage is a little less than $200,000.
It is for this reason that many individuals choose to do shorter term loans, even though the monthly payments are greater. A 15 year fixed 5% interest rate loan will run a total cost of only $142,000 – $50,000 less than the 30 year mortgage.
However, it is far more important for you to be able to make your payments than it is to save this money over time. If you can, then a 15 year mortgage represents greater financial value, but if you cannot, a 30 year mortgage will allow you to live more comfortably during the time you are paying back your loan.
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