A mortgage is a loan that banks and other lenders offer to their customers to purchase a property or home. Since the repayment of this loan takes a long time, it is prudent to be aware of how to do mortgage calculations to make an informed decision. When acquiring a home mortgage, most lending institutions usually approve a loan of up to 80% of the home value, though some banks can even cover the entire amount (Corporate Finance Institute, 2020). Once the mortgage is approved, the customer is meant to repay the loan by making monthly payments determined by several factors. These factors include the home value, the down payments, the mortgage types, and the interest rates.
The home value is critical because it is determined by the amount of mortgage a borrower can qualify to get from a bank. When calculating the monthly repayment amount, the higher the home’s value, the more mortgage and the monthly payment. Another essential factor to consider is the down payment of the house. This is the amount of money the loan applicant contributes towards buying the home (Corporate Finance Institute, 2020). Most lending institutions do not offer the entire mortgage amount since they expect the customer to show some interest and commitment to acquiring the property. By making a higher down payment towards a house, the amount one needs to borrow reduces significantly, and so does the monthly payment amount.
The two types of mortgages that exist are fixed-rate and adjustable-rate mortgages. On the one hand, the fixed-rate mortgage offers an established interest rate that does not change over time. This means that the amount paid every month is known, and therefore, the borrower can budget for this amount in advance since there are no extra charges in the subsequent months (Corporate Finance Institute, 2020). On the other hand, adjustable-rate mortgages (ARMs) come with an interest rate that changes over the mortgage’s lifetime. Consequently, this implies that the monthly repayment amount is not guaranteed and can change often. Another factor affecting the monthly repayment amount is the loan’s interest rate (Corporate Finance Institute, 2020). The higher the interest rate, the more the lender will earn from the mortgage. Subsequently, the homebuyer will pay a higher monthly repayment amount if the mortgage’s interest rate is high.
The factor that surprised me the most is the adjustable-rate mortgages (ARMs), which fluctuate in interest rates. The mortgage calculations revealed that if the mortgage interest rate increases significantly, then the mortgage repayment amounts can become so high to the extent that the borrower cannot meet. This, in turn, will lead to loan default, and the borrower can lose their property through foreclosure. Despite this risk, AMRs are popular because the homeowner can acquire a mortgage at a low interest and hope that their income will also have increased as the interest rate increases.
To ensure that I pay the least amount for the house over the loan’s life, I would secure the mortgage at the lowest interest rate possible. This would guarantee that the total cost or interest paid towards the house will be minimal. I would also make offers below the asking price so that the amount borrowed is minimal and the required down payment is also low. Moreover, I would also negotiate for the lowest closing costs by asking for the least insurance amount and property taxes since these are additional costs to acquiring the mortgage. Although mortgages need long-term financial commitments, the satisfaction of eventually becoming a homeowner makes it worthwhile.
Reference
Corporate Finance Institute. (2020). Mortgage – Definition, overview, examples, types & payments. Web.