Most future borrowers simply want to know what their payment will be. Typically the question comes in the form of “what is your rate today” but ultimately it boils down into how much will go toward the mortgage. Of course the main factor is indeed the interest rate. A person’s gross monthly income is used to help calculate not just how much a monthly payment will be but also the maximum amount someone is eligible to borrow.
Mortgage programs have various terms or requirements. Borrowers can select a particular mortgage program but after that selection they must choose from a list of interest rates along with that program. For example, a traditional 30 year fixed rate conforming loan will offer a range of interest rates, all based upon the cost of obtaining that rate. A 30 year rate might be available at 4.00 percent with no discount points and maybe 3.50 percent with one discount point. A point is expressed as a percentage of the loan amount. One point on a $300,000 mortgage is $3,000. We’ll work together to decide whether or not paying points works in your favor.
Lenders don’t really care if someone pays a point or not. A point is a form of prepaid interest. When someone pays a point to lower a rate, the lender gets the prepaid interest upfront in lieu of over the life of the loan. A no point loan will have a slightly higher rate and the lender collects its interest each month with no upfront interest payment made. The decision is completely up to the borrower.
Mortgage payments are also calculated upon how long the amortization period, or loan term will be. The most common loan term is the 30 year fixed rate loan. All mortgage companies offer the traditional 30 year fixed. There are other loan terms available from which borrowers can choose. The longer the loan term, the lower the monthly payment. At the same time however, the longer loan term ultimately means more interest paid to the lender. Again, the decision regarding the term of your new loan is completely up to you but you should know you have choices.
The second most common loan term is the 15 year term. In fact, the 30 and 15 year terms are the ones most heavily promoted. The 15 year term will have a higher monthly payment but over the life of the loan, interest paid to the lender is cut by nearly half with the shorter term. But there are other options besides just the 30 and 15 year programs. In addition, there are 10, 20 and 25 year terms. Some specialty programs can even stretch a loan term over the course of 40 years but these aren’t very common.
One of the issues with a shorter term loan, say a 15 year compared to a 30, is the monthly payment is so much higher than a 30 year term that the applicants no longer qualify due to the higher monthly payments. That’s when an “in between” choice can be made. Instead of a 15 year term, borrowers can select a 20 or 25 year term. For those who want to pay less interest over time but find the 15 year payment more than they would like, another term might work out better.
When we begin talking about your loan options, we’ll certainly discuss rates and various loan programs but we’ll also look at which loan term would best suit your requirements. The program, the rate and the term are all important factors when calculating a monthly mortgage payment. It’s more than just the rate.