How loans work
While most home buyers are aware of the basics of mortgages, few first time buyers understand the full structure of the financial instrument. The professional realtors at Prime Source have extensive experience in arranging effective financing for real estate transactions given the interests of our clients, whether they are buyers or sellers. At a base level, mortgages are comprised of base (principal) unpaid balances along with the costs of financing the credit through interest. While you’ll also want to incorporate fees, taxes and insurance into the costs, the primary cost of a mortgage comes through the interest rate, which is contingent upon the type of mortgage, as well as your credit rating and history.
You can get an annual credit report which provides
insights into your credit score – these reports are free, and allow you to see
your active financial accounts. Keep in mind that any active accounts, late
payments, historic accounts (in the last 10 years) and unmet obligations (including
bankruptcies and foreclosures) have an adverse impact upon your credit score.
As a result, we can help you to understand how to you can lower the costs of
buying a home by making improvements to your financial condition. Making
adjustments to your financial strategy can result in impressive improvements in
borrowing costs by shifting the interest rate a few percentage points or
choosing a loan from a different provider or with a unique structure.
Understanding how mortgage payments are structured
At a base level, the interest payment on a mortgage is determined by an amortization table which is relative to the interest costs and principle balance on the loan itself. Therefore, a higher down payment can result in lower financing costs by virtue of reducing the base rate of the financing process. With an amortization table you can determine the base financial costs of the loan given the amount, interest rate and duration of the loan (in terms of years until the transaction is complete.) Therefore, in order to determine the monthly financing costs you can evaluate how a change in the length, interest rate or principal amount would impact your ownership costs over time.
There are a wide variety of considerations when determining the ideal structure for a loan. The single most important factor involved in a mortgage outside of the choice of lender and loan structure itself is the amount of equity you own in a home. Your actual ownership of a property is contingent upon the ratio of principle payment you have paid – when you pay off the entire balance of the loan you are considered as having full equity in the property. Most mortgages provide different structures and lengths that can determine how soon you become the full owner of the property. Depending on your credit rating and score you may be required to invest in a higher proportion of ownership in the property in order to qualify for financing. Given the condition of the lending markets, many lenders often require buyers to purchase up to 1/3 full equity in the home with a down payment in advance of qualifying for interest payments.
Another important factor to consider is the
structure of your loan itself. With variable interest loans, the cost of the
financing portion can vary over time along with the market costs of lending,
property value estimates and factors specified in your loan contract.
Importantly, if your property value declines or borrowing becomes more
expensive for your bank, an interest-only or variable interest loan can become
much more expensive. In most cases, a fixed and principle interest loan is
preferred, as it gives you a better structure to anticipate costs.
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