Everyone who owns a home knows all about mortgage installment payments. When you purchased your home you arranged for a mortgage on your home after placing as much money down as could. The more money you were able to put down on the home meant that your monthly installment payments were lower, leaving more disposable money for other things each month. Even with this approach many people found they were carrying huge mortgages with huge monthly installment payments required on their homes.
Over the past year we have seen the real estate melt down in the US with millions of people losing their homes when they could not continue to meet their monthly payments or in some case just chose not to continue making payments. Many consumers just concluded that even though they could make the payments, there was no sense in continuing when the value of their homes had lost so much money. Others lost their jobs and suddenly found themselves in dire straights when they could not meet their monthly installment payments on mortgages and loans that they may have had.
Principal, Interest Rates and Term
These are the three factors that are used to calculate your monthly payments. When you negotiate a mortgage, consumers need to pay attention to these factors and several others which we will get into a little later in this post. Your initial monthly payments will be determined by these three factors and it might mean the difference between affording your home and not.
Reducing the amount of money you need to borrow will lower your monthly payments. Obviously you want to get this as low as possible, however at the same time if you are planning some renovations to your new home, you may want to consider borrowing enough to fund these renovations.
The interest rate has a big impact on your payments. Consumers should work hard to get this as low as possible for as long as possible. Any time the interest rate changes on your mortgage, you run the risk of your monthly installment payments increasing and your home becoming unaffordable.
The term is another factor that influences monthly payments. Longer terms will lower your payments. Some people will take a short term mortgage of 15 or 20 years, while the most common is 25 years. There are also mortgage terms of as long as 35 years, however we think these are not the norm. The term is the time that it will take you to pay of the mortgage in full.
Read the Fine Print
Although you have a term of 25 years on your mortgage, your interest rate can change more often. Many banks will offer a 5 year commitment to the interest rate they are giving you on the mortgage. This means that the interest rate will not change for 5 years. At the end of five years , your monthly installment payments on your mortgage will change based on new calculations of the remaining principle, the remaining term and the new interest rate that is available at that time.
If the prevailing interest rate has increased, then your monthly payments are going to go up and conversely if the interest rates have gone down, then your payments will also go down. This is the normal type of arrangement that many banks offer and consumers have come to expect.
Unfortunately we have learned that many banks in the US were offering mortgages that did not follow these guidelines. the fine print might refer to a change in interest rates partway through the initial 5 years. There were subsidies to the interest rates for a few years that allowed many people to purchase their own homes who normally would not have qualified for a mortgage. When the subsidy ended they were in trouble and could not meet the required monthly payments!
Always take the time to read the fine print and understand the impacts. If you do not understand what is being included, ask questions and get a 3rd party to explain it to you. At the end of the day, it is your home, your credit and your families lifestyle that you are putting at risk, so be fearless in taking the time to make sure that you can always afford to continue to make your monthly installment payments.
Taxes and Mortgage Payments
Some banks want to make sure that home owners will pay their property taxes and will not fall behind in this area. As a result they will ask you to make a monthly installment payment on your taxes. The bank will collect one twelfth of the estimated property taxes that are due on the home each month in addition to your regular monthly mortgage installment payment.
The money collected for your taxes goes into a special account they have set up for you. When the taxes become due the bank will make the payment on your behalf and ensure that your tax account is paid and always up to date. This is an excellent way to pay your property taxes. It smooths out your tax payment into 12 equal payments and gets you into the habit of making these payments on a regular basis.
Failing to pay your property taxes can be as bad as not paying your mortgage payments. The city will place a lien on the property if there are taxes owing which means you cannot sell the home until you have paid this overdue tax bill in full. Always pay your monthly mortgage installment payment and your monthly tax payments on time every month to avoid any difficulty in this area.
Taxes and Interest
In Canada, we cannot claim the interest we pay on mortgages and loans against our income to reduce the amount of income taxes we pay. The only exception to this is if we borrow money to make investments which earn income.
In the United States, consumers can claim the interest they pay on mortgages to reduce their total amount to income tax they will pay. Consumers need to consider very carefully their monthly payments and ensure that they can always meet the payments and keep their credit rating intact.
Disclaimer: The views expressed by this author don't necessarily reflect the opinions of Lazerloan.com, it's owners, or it's affliates.
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