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.

Most people have a mortgage on their home and make monthly installment payments to their mortgage lender, usually on the 1st of the month. Mortgages on your home are usually at a competitive interest rate for terms of 5 years with an amortization of 25 years with some being as long as 35 years. What this really means is as follows. You have a mortgage installment payment that is fixed for the term using an interest rate that is also fixed for the term based on payments that are paid over the life of the mortgage or amortization. At the end of the term the mortgage company will offer you a new term, usually 5 years, at the prevailing interest rate. This new interest rate may be higher or lower, depending on current interest rate in the market.

As long as you always meet your monthly installment payments on your mortgage, your mortgage will be considered in good standing and your credit rating will be unchanged. Should you miss a payment or are late making your payments, the bank may get nervous and call the mortgage and / or file a comment on your credit rating which would make it more difficult to borrow money in the future.

Home Loan Installment Payments

Many consumers will also arrange for a home loan that uses their home as collateral that is in addition to any mortgage that they may have on their home. The installment payments on this home loan will be based on a term of whatever you negotiate, and amortization of the same term. This means that your home loan installment payments may be proportionally higher than the monthly installment payments on your mortgage.

Home loans are attractive especially when they are registered as a loan against your home. The interest rate is lower than a standard personal loan, because the bank perceives less risk associated with the loan. They can always sell your home to collect the principle remaining on the loan. Of course they will stand behind the mortgage holder in terms of who gets paid first.

Some consumers prefer this approach vs. increasing their mortgage because they can pay the loan off separately from their mortgage. The installment payments each month are different of course and will end once the loan is paid off.

In summary the major of a registered home loan is a better interest rate than what you might be able to negotiate on a straight personal loan. So you pay less interest and your installment payments each month are lower as well.

Why Would You Want a Home Loan

Home loans can be used for a multitude of purposes. Many home owners will take out a small home loan to cover renovations they plan to make on their home. Window replacement, a new roof , perhaps some new furniture are just a couple of examples. Typically they are larger than what your credit card can handle and they want to avoid the high interest rates of a credit card balance. Credit card balances will be charged an interest rate of 18% to as much as 28% depending on the store or credit card that you use. Compared to taking out a home loan at prevailing interest rates of around 5% at the beginning of 2010, this is a much better deal.

The installment payments on a home loan vs the installment payments on a credit card will be a lot lower and much more attractive.

Consolidating Loans into One Home Loan

Home loans might also be taken out to consolidate other loans into one manageable loan. Depending on the size of the loans, the maturity dates and the interest rates that are being charged on these loans you may or may not have a lower monthly installment payment. Talk to your local banker to see what your options are and how much your consolidated loan installment payments would be. Once yo have this information, you can make an informed decision about consolidating your individual loans.

In addition to comparing the interest rate and the monthly installment payment you should also ask the banker to tell you what the total cost of the home loan will be. This cost will be the total amount of interest you will be expected to pay and any fees that may or may not be charged to register the loan.

It is important to compare these numbers in addition to your monthly installment payment and interest rate. You could be paying more interest that you thought plus fees just to consolidate your existing loans.

Banks are There to Make Money

All of the banks are in business to make money and with the number of banks offering banking services, they are also pretty competitive. The point to remember that like all financial advisers they do not make money unless they sell something to you. Consumers need to do their home work regardless of what type of loan they are looking at.

If you are thinking of taking out a new loan to consolidate your existing loans and registering your loan against your home to obtain a better interest rate, always examine the details. What is the interest rate? What is the term of the loan? What are the installment payments? What fee’s if any will be applied to register the home loan? and What fee’s if any are there to discharge the home loan?

Always compare the answers to these questions against your current situation. There is no single answer as to what to do since every situation is different and people have different criteria. Some folks are totally focused on finding a home loan with the lowest monthly installment payment, while others will focus on the total cost of the home loan e.g. fee’s plus interest.

Once you have completed your assessment make the best decision for you that fits your situation and needs. You may not obtain exactly what you are looking for in terms of the best deal, but at least you have done the analysis and know what you are getting into. Good luck and we appreciate comments on our posts.