Your monthly mortgage cost can increase leaving you paying way more than you bargained for. Knowing the factors that affect the cost can help you better prepare for the home-buying process and make informed decisions.
Here are six key factors that you should know:
Your Mortgage Term
Longer-term loans may have lower monthly mortgage payments but they come with higher interest rates which increases the overall mortgage cost.
This is compared to loans with shorter payoffs with low-interest rates and lower overall costs.
This is because short-term loans constitute less risk to mortgage lenders and this attracts lower home loan rates. The odds that your mortgage cost will increase dramatically during a short-term duration are low.
Your mortgage term can influence today’s home loan rates, however, you can get low-rate offers that are just right for you.
Credit Score
Your financial status has a major influence on your mortgage cost and interest rates. Mortgage lenders use credit scores to verify buyers’ credibility.
For context, home buyers with higher credit scores get lower interest rates than buyers with low credit scores.
A high credit score can get you access to any mortgage lender; from national banks to individual mortgage companies. With a low credit score, there is little chance you would get a mortgage company to grant your loan request.
So before shopping around for a mortgage, check your credit, review your credit reports for any errors, resolve credit issues, learn ways to raise your credit score, to get better loan terms and interest rates.
Interest Type
Interest types can also bump up your mortgage costs. The two types are primarily fixed and adjustable rates. Adjustable rates may start low but increase. While fixed interest rates remain consistent for the entire mortgage term.
Rising interest rates can increase your mortgage rate if you’re on an adjustable rate.
However, if you’re on a fixed rate, an increase in interest rates shouldn’t affect your mortgage. Most homeowners go for fixed rates due to loan payment stability.
Down Payment
The lesser the risk for mortgage lenders, the higher your chances of a good mortgage deal, and making a large down payment takes the risk several levels down for lenders.
If you can deposit about 20% or more of the overall cost, you would get a mortgage cost with a low-interest rate.
In cases where the borrower can’t meet up with the above percentage, mortgage lenders will require you to purchase mortgage insurance. This way, their interests are protected in the case of a default.
However, this can increase the mortgage cost. The additional monthly mortgage insurance payment increases your overall cost and this will raise your loan amount.
Loan Types
The mortgage cost for several loan types such as conventional, Federal Housing Administration (FHA) loans, USDA Rural Housing Service loans, and Veteran Affairs loans, varies.
Depending on what loan type you choose, your mortgage cost can either go higher or lower than the standard cost.
Mortgage location
Mortgage rates vary between countries and states. Your state of residence or the state you’re looking to buy your home can influence the mortgage cost.
For example, local mortgage costs are influenced by local competition i.e., the number of mortgage lenders in that location.
Also, the supply and demand in real estate, the economic climate of the state, and the local job growth in the area affect mortgage costs.
In the United States, Alaska, Utah, Montana, North Dakota, and Louisiana have low monthly mortgage costs compared to Massachusetts, New Jersey, New York, Connecticut, Hawaii, Nebraska, and Florida.
