How Do Mortgage Rates & Payment Schedules Affect the Cost of Your Home?

By Sara

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Last Updated: January 5, 2023

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When it comes to purchasing a home, there are a lot of things you will quickly have to learn.

Most people don’t know anything about the home-buying process until they are actually ready to mortgage a home. Before you buy a home, make sure you understand mortgage rates and payment schedules to ensure you are making the right choice for your needs and budget. 

 

What are Mortgage rates? 

If you don’t have enough cash to buy a home outright, you will have to take out a mortgage.

A mortgage will have a mortgage rate, which is the interest that is charged on your mortgage. Your rate will depend on a few factors, like your credit history, how much you are able to put down, the type of mortgage you get, and some other factors.

The lender you are borrowing from will determine your mortgage rate based on these factors. 

The mortgage rate you get will determine how much you will pay monthly on your mortgage.

Your monthly payments will slowly pay off the principal balance (the home’s actual value) as well as the interest on the mortgage. So, over time, you will pay off your home along with the interest that is owed.

 

 

Types of Mortgage Loans

There are many different mortgage loans that a person can get. Each mortgage loan will have different qualifying factors, rates, and term lengths. For example, certain mortgages are for people who can put a certain percentage down, while others are based on certain qualifying factors. 

The eight most common types of mortgages are: 

  1. Fixed Rate Mortgage - 15 years or 30 years
  2. Adjustable Rate Mortgage 
  3. FHA mortgage 
  4. VA mortgage 
  5. Conventional Mortgage 
  6. USDA Mortgage 
  7. Jumbo Mortgage 
  8. Interest Only Mortgage 

 

 

What are Payment Schedules? 

When you have a mortgage loan, you will have to make monthly payments to pay off this loan. When you make a mortgage payment, most people will pay toward their principal balance, the value of the home, as well as the interest on the loan.

A person who recently takes out a mortgage will pay more on their interest than their actual principal at first. Someone who has had a 30 year mortgage for 25 years will make payments toward their principal over their interest. All of this is based on the Amortization schedule. 

There are some instances where you may also make insurance payments if you put more than 20% down, because you’ll be required for private mortgage insurance, also known as a PMI. In addition, some people choose to bundle their property taxes into their mortgages as well. 

 

 

Amortization Schedule 

When you receive a mortgage and have a loan, you will receive an amortization schedule.

This document will tell you exactly how much of your monthly payment will go towards principal and interest, as well as tell you your principal balance remainder. 

Let’s say you take out a mortgage for a 100,000 home with a 30 year fixed rate mortgage and a 6% interest rate.

  • Your monthly payments will be about $600 a month.
  • The very first payment that you make, you will pay $500 towards interest and only $100 towards your home.
  • The amount you owe on the $100,000 mortgage after your first $600 payment is $99,900. 
  • After one year of payments, your $600 will be broken up into $105 going toward your principal and the remainder going toward your interest. 

After 15 years, $243 of your money paid will go towards your interest and the rest towards your principal. 

The longer you pay on your loan, the more you will pay toward the principal instead of your interest. Understanding this payment schedule can help you figure out what type of loan you want, how much down you will put, as well as how interest rates will impact your total payments. 

 

 

Final Thoughts 

Mortgage rates and payment schedules are two important topics to understand if you are purchasing a home.

Most people have to take out a mortgage to buy a home, and they do this with a mortgage rate provided by a lender. Your mortgage rate will impact the overall amount you owe on your home with a payment schedule.

Since you owe money on the house right away, this payment schedule is amortized. Therefore, you will be paying a larger amount towards your interest over your principal for the early parts of your payment. The closer you are to your last payment, the more you will pay towards the principal and less on the interest. 

Photo by Pixabay

 

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