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fixed-rate mortgage

What Is an Amortization Schedule? Mapping Out Your Mortgage Payments

July 27, 2019
iStock/Ekaterina79

What is an amortization schedule? When you borrow money to buy a home, one of the documents you’ll see is an amortization schedule provided by your mortgage lender who could be a retail bank, a mortgage bank, a mortgage broker, or other lender. The word “amortization” refers to the repayment of a debt through regular payments until the loan is paid off in full.

What is an amortization schedule?

In essence, an amortization schedule outlines your loan payments each month and helps keep you on track.

When you take out a fixed-rate mortgage—whether it’s for 30 years or any other term—your lender calculates an amortization schedule based on the beginning balance, interest rate, and number of payments that shows your payment for each month of your loan.

The schedule shows your interest calculation and how the payment is divided into principal and interest, so you know how much of each you pay each month. It also calculates the outstanding balance of your loan as you progress through the loan term.

By looking at your amortization schedule calculator, you can see how the amount of interest you pay changes compared with the amount of principal you pay during the life of the loan.

You can view your amortization table on a monthly or yearly basis. In the early years of your mortgage, the schedule shows that your monthly payment is almost entirely interest. The higher your interest rate, the more interest expense you pay with each monthly payment. Gradually that shifts due to amortization—lowering of the balance by periodic payments. By the end of your loan schedule, the calculator shows your payments going almost entirely to pay down your principal.

Thinking about refinancing your loan?

When you make your first payments on a home, you may not pay attention to your balance or how your payments are split. You may be happy to be in a home and keeping up with the payments.

After you’ve owned your property and made payments for a few years, though, you may be thinking about refinancing or selling. In that case, you’ll need to know your balance so you can estimate your home equity. You can find this information on the amortization schedule calculator, or on your latest mortgage statement.

If you decide to refinance, remember if you switch from one 30-year loan to another, you’re restarting the interest clock and could end up paying more over time, even with a lower rate. For example, if you get a new loan after seven years of payments into a new 30-year loan, you’ll be paying interest on your home for a total of 37 years, between the two loans. It may be worth it, however, if you qualify for a lower interest rate.

Paying down your principal loan balance

Another reason to pay attention to your amortization table—and to use an amortization calculator—is you can easily see the benefit of making extra payments to reduce the principal balance on your loan. While your monthly payments won’t change unless you start over with a new loan, you can pay off your loan early by making additional payments.

In fact, you can use amortization to your advantage to save money and pay off your loan faster. If you make an additional loan payment of $1,000, for example, a calculator will show you that it saves you more than $1,000 over the life of the loan. That’s because the additional payment helps you amortize your loan faster; in other words, lower the balance and thus save on interest expense.

Here are three ways to pay down your balance faster:

  • A little extra each month: Round up your payment and designate it to pay down your principal.
  • A lump sum payment: If you get a windfall, bonus, or tax refund, use it to pay down your balance.
  • Biweekly payments: By paying half of your mortgage every two weeks, you end up making one extra month’s payment each year.

You can try different scenarios on a calculator to see how even small, regular additional amounts can speed amortization of your loan along.

Regardless of how you make extra payments on your amortizing loan, make sure your lender applies the payment to the principal amount, if your goals are to decrease total interest expense and shorten the effective term of the loan.

Study your amortization schedule when you get it to see if you can accelerate your loan payoff date.

The post What Is an Amortization Schedule? Mapping Out Your Mortgage Payments appeared first on Real Estate News & Insights | realtor.com®.

A Guide to Mortgage Interest Rates: Why They Go Down and Up, and What to Do

April 11, 2019

Mortgage interest rates are a mystery to many of us—whether you’re a home buyer in need of a home loan for your first house or your fifth.

After all, what does “interest rate” even mean? Why do rates swing up and down? And, most important, how do you nab the best interest rate—the one that’s going to save you the most money over the life of your mortgage?

Here, we outline what you need to know about interest rates before applying for a mortgage.

Why does my interest rate matter?

Mortgage lenders don’t just loan you money because they’re good guys—they’re there to make a profit. “Interest” is the extra fee you pay your lender for loaning you the cash you need to buy a home.

Your interest payment is calculated as a percentage of your total loan amount. For example, let’s say you get a 30-year, $200,000 loan with a 4% interest rate. Over 30 years, you would end up paying back not only that $200,000, but an extra $143,739 in interest. Month to month, your mortgage payments would amount to about $955. However, your mortgage payments will end up higher or lower depending on the interest rate you get.

Why do interest rates fluctuate?

Mortgage rates can change daily depending on how the U.S. economy is performing, says Jack Guttentag, author of “The Mortgage Encyclopedia.”

Consumer confidence, reports on employment, fluctuations in home sales (i.e., the law of supply and demand), and other economic factors all influence interest rates.

“During a period of slack economic activity, [the Federal Reserve] will provide more funding and interest rates will go down,” Guttentag explains. Conversely, “when the economy heats up and there’s a fear of inflation, [the Fed] will restrict funding and interest rates will go up.”

How do I lock in my interest rate?

A “rate lock” is a commitment by a lender to give you a home loan at a specific interest rate, provided you close on your home in a certain period of time—typically 30 days from when you’re pre-approved for your loan.

A rate lock offers protection against fluctuating interest rates—useful considering that even a quarter of a percentage point can take a huge bite out of your housing budget over time. A rate lock offers borrowers peace of mind: No matter how wildly interest rates fluctuate, once you’re “locked in” you know what monthly mortgage payments you’ll need to make on your home, enabling you to plan your long-term finances.

Naturally, many home buyers obsess over the best time to lock in a mortgage rate, worried that they’ll pull the trigger right before rates sink even lower.

Unfortunately, no lender has a crystal ball that shows where mortgage rates are going. It’s impossible to predict exactly where the economy will move in the future. So, don’t get too caught up with minor ups and downs. A bigger question to consider when locking in your interest rate is where you are in the process of finding a home.

Most mortgage experts suggest locking in a rate once you’re “under contract” on a home—meaning you’ve made an offer that’s been accepted. Most lenders will offer a 30-day rate lock at no charge to you—and many will extend rate locks to 45 days as a courtesy to keep your business.

Some lenders offer rate locks with a “float-down option,” which allows you to get a lower interest rate if rates go down. However, the terms, conditions, and costs of this option vary from lender to lender.

How do I get the best interest rate?

Mortgage rates vary depending on a borrower’s personal finances. Specifically, these six key factors will affect the rate you qualify for:

  1. Credit score: When you apply for a mortgage to buy a home, lenders want some reassurance you’ll repay them later! One way they assess this is by scrutinizing your credit score—the numerical representation of your track record of paying off your debts, from credit cards to college loans. Lenders use your credit score to predict how reliable you’ll be in paying your home loan, says Bill Hardekopf, a credit expert at LowCards.com. A perfect credit score is 850, a good score is from 700 to 759, and a fair score is from 650 to 699. Generally, borrowers with higher credit scores receive lower interest rates than borrowers with lower credit scores.
  2. Loan amount and down payment: If you’re willing and able to make a large down payment on a home, lenders assume less risk and will offer you a better rate. If you don’t have enough money to put down 20% on your mortgage, you’ll probably have to pay private mortgage insurance, or PMI, an extra monthly fee meant to mitigate the risk to the lender that you might default on your loan. PMI ranges from about 0.3% to 1.15% of your home loan.
  3. Home location: The strength of your local housing market can drive interest rates up, or down.
  4. Loan type: Your rate will depend on what type of loan you choose. The most common type is a conventional mortgage, aimed at borrowers who have well-established credit, solid assets, and steady income. If your finances aren’t in great shape, you may be able to qualify for a Federal Housing Administration loan, a government-backed loan that requires a low down payment of 3.5%. There are also U.S. Department of Veterans Affairs loans, available to active or retired military personnel, and U.S. Department of Agriculture Rural Development loans, available to Americans with low to moderate incomes who want to buy a home in a rural area.
  5. Loan term: Typically, shorter-term loans have lower interest rates—and lower overall costs—but they also have larger monthly payments.
  6. Type of interest rate: Rates depend on whether you get a fixed-rate mortgage or an adjustable-rate mortgage, or ARM. “Fixed-rate” means the interest rate you pay remains fixed at the same level throughout the life of your loan. An ARM is a loan that starts out at a fixed, predetermined interest rate, but the rate adjusts after a specified initial period (usually three, five, seven, or 10 years) based on market indexes.

Tap into the right resources

Whether you’re looking to buy a home or a homeowner looking to refinance, there are many mortgage tools online to help, including the following:

  • A mortgage rate trends tracker lets you follow interest rate changes in your local market.
  • mortgage payment calculator shows an estimate of your mortgage payment based on current mortgage rates and local real estate taxes.
  • Realtor.com’s mortgage center, which will help you find a lender who can offer competitive interests rates and help you get pre-approved for a mortgage.

 

The post A Guide to Mortgage Interest Rates: Why They Go Down and Up, and What to Do appeared first on Real Estate News & Insights | realtor.com®.

I Got an Adjustable-Rate Mortgage and Wow, What a Ride!

April 6, 2019

designer491/iStock

If you’ve ever asked anyone for mortgage advice, you’ve probably been told by well-meaning, conservative folks that in most circumstances, you should never get an adjustable-rate mortgage, aka ARM. The reason: Sure, an ARM’s initial low interest rate might look enticing, but as the name suggests, that rate will change later—and most likely go up.

Well, call me crazy, but my husband and I got an ARM. And it was so not what I’d imagined!

Curious to hear how this decision impacted our finances over five, 10 years—and beyond? Allow me to walk you through the details, and what I learned in the process.

Why we got an adjustable-rate mortgage

It all started back in 2007, when my fiancé, Jim, and I had found the perfect house for sale for $1.25 million—which I know sounds like a lot, but we lived in Los Angeles, where housing prices were ridiculous (and still are today).

adjustable rate mortgage
Our home in Los Angeles

Lisa Johnson Mandell

We’d both been scrimping and saving for decades. I’d just signed a book contract, and had extra funds from the purchase and sale of two condos previously. This was not my first trip to the real estate rodeo, nor was it Jim’s; he’d bought and sold a house as well. Even though $1.25 million was at the very top of our budget, we were ready to combine our savings and close the deal about a month before tying the knot.

Up until this point, I’d been a financially conservative, 30-year fixed-rate mortgage type of girl. Jim was more of a liberal, “Let’s check out our options” kind of guy. He was also very persuasive.

He told me, “Unless you plan to live in your house for 30 years and pay it off, a 30-year fixed doesn’t make sense. It’s better to pay the least to net the most.”

I reluctantly agreed. So we got an ARM, and to ratchet up my nerves further, it was an interest-only loan. That meant that for 10 years, we wouldn’t be paying back any principal at all. Jim said this was OK, since our home’s value was likely to rise, so we’d gain equity that way.

Or so we thought.

ARM: The first five years

On closing day, we put $225,000 down, leaving a cool million to finance. At the time, the best interest rates we could get on a five-year ARM was 5.875%. That meant our monthly payments would amount to $4,895 (rounding off numbers, for simplicity’s sake) for the first five years. After that, they’d adjust once every year for the next 25 years.

All was fine at first. But a year in, the housing bubble burst. Since we’d bought right when the market had peaked, the value of our home started dropping, fast.

For certain ARMs, the housing crash actually had a weird upside: Interest rates plummeted, so many ARM owners enjoyed lower mortgage payments than ever. Alas, our own ARM was fixed for those five years, so we couldn’t take advantage of that—and we couldn’t refinance because we were underwater on our mortgage and had so little equity in our home.

I figured that by the time our interest rate started adjusting four years later, mortgage rates would start going up.

ARM: Five years in

Yet once our five-year fixed-rate term was over, our interest rate began adjusting—even lower than before! Jim and I couldn’t believe our good luck. And it continued to adjust downward for the next five years.

One year, when our rate went below 3%, we were only paying $2,370 per month for a $1 million+ home. Woohoo! We took a nice cruise that year to celebrate.

ARM: Ten years in

But the fun came to a crashing halt at the end of our 10-year term in 2017.

At that point, interest rates rose to 4.7% … and continued to climb. Plus, due to our interest-only loan, it was now time to pay off principal and interest. Our monthly payments ballooned to over $6,300 per month.

When I showed Jim our new monthly payment, a panicked discussion ensued. We desperately tried to refinance, but by then, lenders had tightened up their restrictions on who could qualify—and our careers and incomes had changed considerably. My books had long since been published, and while I was thriving as a freelance journalist, that doesn’t look great on a loan application. As for Jim, he was in the middle of transitioning from successful small business owner to “Sci-Fi Rock Guy.” (I know. But remember: L.A.).

“At least we’re finally paying off some principal,” Jim said, sweat running down his forehead.

There was that. Almost $3,000 of our monthly payment was going toward principal, although that was cold comfort as we scrambled to make our monthly payments.

How we finally refinanced our adjustable-rate mortgage

Yet after about a year of numbly writing checks, we got a call from Darren Hammel, a sales manager at Wells Fargo, where we’d signed up for our ARM over a decade earlier.

“Your payments are really high,” he commented. “Would you like to look into lowering them with a refi?”

I was ecstatic. Jim was suspicious.

“Why would a bank want to lower our payments?” he asked. “And besides that, we won’t qualify.”

But Darren explained that we had a good history with Wells Fargo, and it behooved them to keep customers like us on their books. They were also willing to keep the refi expenses to a minimum—we would be charged very little for the pleasure of the transaction.

Ironically enough, we discovered that we could only qualify to refi if we went with that good old traditional 30-year-fixed interest rate. Yes, things had changed since we’d first applied for a home loan 12 years earlier!

Within no time, Darren worked his mortgage magic, and a few months later, we’re sitting pretty with a 30-year, 4.121% interest rate mortgage with nice, comfortable, predictable payments of $4,570 per month. And because Wells Fargo had that notorious computer breakdown in the middle of closing, we were given a $2,500 mortgage credit for our troubles. Nice!

So we are now better off than when we started, and the value our home has increased again. We have more equity in the place, even though we haven’t paid it down much. To tell you the truth, if we’d gotten a 30-year fixed-rate mortgage in the beginning, we wouldn’t have had to go through all the turmoil, and we’d have more equity in our home now.

Still, it could have been much, much worse. Had we not had money on hand to pay our mortgage, we could have lost our home.

It all worked out all right, but in the end, I’d have to say that I agree with those well-meaning, conservative folks: Signing up for an ARM imperiled my finances and peace of mind. I’m not saying there wouldn’t be instances where I’d try and ARM again, but I’d think about it very carefully.

After all, life, much like interest rates, is unpredictable.

The post I Got an Adjustable-Rate Mortgage and Wow, What a Ride! appeared first on Real Estate News & Insights | realtor.com®.

That’s So 2018! Outdated Mortgage Advice You Should Ignore Right Now

February 5, 2019

Buying a house is one of the most exciting things you’ll ever do in your life — and signing the mortgage for that house will probably be one of the most terrifying.

Since navigating the home loan process can be scary to do alone, many people might be tempted to seek out guidance from someone who’s been there, done that. But you should probably ignore everything your Uncle Bob says. (Sorry, Bob!) And Aunt Sue, while we’re at it. They may mean well, but let’s face it, they haven’t taken out a mortgage in 20 years. In fact, even a friend or family member who got a mortgage last year might lead you far astray (in a well-meaning way, of course), since the rules of home financing really do change on a dime.

Our two cents? For starters, beware these dusty pearls of wisdom below. They might have worked wonders back in 2018, but they don’t necessarily work for everyone right now. Here’s why, as well as some fresher, tastier alternatives.

Get a mortgage with a fixed interest rate

You’ve probably always assumed you’d get a 30-year mortgage with a fixed interest rate. Your parents had one … and isn’t that the only way to get payments you can afford? These days, you have many more choices, and reasons to try them out.

“People aren’t buying their forever home right out of the gate anymore, so the benefits of a 30-year mortgage aren’t necessarily there,” says real estate agent Heather Carbone with the Heather Carbone Team at Big River Properties in Boston. She explains that many first-time home buyers are buying starter homes, and that they plan to move on to something bigger and better after a few years. “Going with a five- or seven-year adjustable rate mortgage [ARM] could potentially save them a couple of hundred dollars off their monthly payment and ease the monthly payment burden a little bit, as they will most likely sell their home before the rates adjust,” she says. Here’s more on the pros and cons of ARMs vs. fixed-rate mortgages.

Make a 20% down payment

When you’re trying to come up with a down payment on a house, 20% sounds like a huge amount. So how do people come up with that kind of cash? Most of the time, they don’t. At least not anymore.

“I meet with lots of young buyers who have been instilled by their parents and others that the only way to buy a house is with a large, 20% down payment,” says Carbone. “In today’s market, that couldn’t be any further from the truth. Provided the buyer has a solid credit score, down payments as low as 3.5% are very much a reality today.”

Real estate agent Melissa Rubenstein, with KW Village Square Realty in Ridgewood, NJ, agrees. “While 20% has traditionally been a benchmark for what is acceptable, this no longer holds true in the market, she says. “With FHA loans requiring around 3%, and other traditional loans offering 10% down options or lower, it makes sense to explore different products with your lender. Don’t miss out on historically low interest rates while trying to stash away cash.”

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Watch: How to Get the Best Mortgage Interest Rate You Possibly Can

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Wait for interest rates to drop

It seems like interest rates could always be better, but according to Bruce Ailion, real estate agent with Re/Max Town and Country in Atlanta, that might not be true at the moment.

“For 2019, we are likely at the end of the low interest cycle, and interest rates are at their lowest,” he explains. “Today is the time to buy, if interest rates are the determining factor.”

You can always wait for them to go lower, but you might be sorry if you do.

Meet with your lender in person

In the past, the only way to talk with a lender was to walk into a bank, which often meant taking time off work and rearranging your whole day. In 2019, things are getting easier.

“Times are changing, and visiting a bank branch to meet with a lending officer is not the only route to getting a mortgage. Now, you can apply for a mortgage online,” says Kathy Cummings, senior vice president of Homeownership Solutions and Affordable Housing Programs at Bank of America in Charlotte, NC. “Research shows that 32% of Americans are comfortable applying for a mortgage digitally.”

This doesn’t mean human contact is obsolete. “When you have questions that you want to speak to an expert about—in person or by telephone—you have the option,” Cummings says. Consider it the best of both worlds.

Pay off your mortgage as fast as you can

If you have a 30-year mortgage, chances are you have a dream to pay it off in at least 20. Not only will it give you an extra 10 years without a monthly payment, but it’ll save you tons of money in interest. Right?

Not really. Jeff Chervenak, president of Guaranty Federal in Bloomfield, CT, says that’s not necessary anymore—and it probably won’t save you much money.

“Paying off your mortgage as a goal is as much emotional as financial. Because interest rates are, even now, so low, consider saving and investing with the money you would use to pay down your loan separately,” he explains. “Liquidity has a lot of value, and you could always use the lump sum accumulated to pay it down or off any time you wish.”

In case you haven’t figured it out yet, mortgages today are very different from they were just a few years ago. Do your homework before you make any decisions, and check with an expert you trust before you sign on the dotted line.

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