What Determines Your Mortgage Payment?

The size and the term of the loan determine how much money a borrower needs to pay every month. The principal is arrived at after deducting the down payment from the total purchasing price of the house. To the principal and interest, extras like closing costs, property tax and private mortgage insurance (if applicable in case of low down mortgages) is added. Interest is calculated monthly on the principal amount in standard interest rates. A mortgage with simple interest rates, interest is calculated daily. Paying bi-weekly is not beneficial to the borrower, as he has to pay an additional amount, though the lenders may claim otherwise.

Mortgage payments are determined by the type mortgage the borrower has selected. Interest only mortgage has a low monthly payment initially (only interest) paid in the first few years until the interest only period lasts. Once the interest only period ends the monthly payments increase. Ultimately, the borrower pays more with this type of mortgage.

Balloon payments require the borrower to pay a low monthly amount initially and pay a large sum (a balloon amount) at the end of 5-7 years to clear the loan.

Fixed rate mortgages have a fixed rate of interest throughout the life of the mortgage. The interest percentage remains the same. Adjustable rate mortgage on the other hand has variable interest rate that makes the borrower pay more if the interest rates rises and pay less if the interest rate falls.

A higher down payment means fewer payments to make. A shorter period of loan reduces the amount of payment substantially. A longer loan term increases the total amount of total payment though the monthly payments remain low as the total loan is spread over a longer period.

On the other side of spectrum of mortgage payments, your income and debt liabilities would decide how much you could pay per month. You may make payments periodically (other than the monthly payments) to reduce the principal and the interest due. If you hold a well paying job that pays handsome bonuses too, the amount of loan will come down drastically if the bonus is used to clear part of the loan. Lenders charge a small fee for such arrangements.

The points in a mortgage loan will inflate your amount to be paid. The higher the points the broker charges the greater the loan amount will be. Observe clearly what is market rate will be at the time of your agreement on a particular type of mortgage. Market rates may vary from the time a loan is agreed upon and when the loan form is finally submitted. The lender would prefer not to inform you about any decrease in the market rate in the meanwhile. This can add to your mortgage amount unnecessarily.