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Save by paying more
How can I know how much I will save by paying more on my monthly mortgage payments?
Taking a mortgage on your home is the largest and the longest debt that you will take in your life. However, investing in a house is a necessity, so you must be smart and try to see how you can save by paying more on your monthly mortgage payments. Your mortgage statement should show the amount repaid towards principal and interest. Calculate how much extra you can afford to add to your monthly installment based on your income and expenditure.
Why should you want to know about savings on your mortgage payments?
Its really as simple as controlling the future of your finances and saving thousands of dollars towards interest payments every year. You may never have enough finances to pay off the mortgage right away, or enough equity in your home to opt for a refinance. But you can make additional payments to reduce the accruing interest on your mortgage. This is important because interest payments over the life of the mortgage amount to nearly twice the value of the home. You must realize that the mortgage accrues interest every day and your lender has a vested interest in a long-term mortgage. So you be wiser and add just $50, $100 or $500 depending on your monthly budget, towards paying off the principal amount of your mortgage.
How can a mortgage calculator help you calculate the savings on your monthly mortgage payments?
You will usually take a 15 year or a 30 year mortgage. Manually calculating the savings every month of this long tenure is tiring and you are bound to make errors. Instead it is better to use an additional payment mortgage calculator available at several financial websites for the same.
Example
For example, for a loan amount of $120,000 with a 30 year mortgage, the monthly mortgage repayment at 9% works out to be $733.76. If you simply add $100 to this monthly payment, you can repay the mortgage in 20 years and nine months with a huge saving of $82,000 in interest. This is because your additional amount goes towards repayment of the principal. The $100 you pay in the first month would actually be $270 with interest. The next month you save $268 and so on. So you save about ten years and more than eighty thousand dollars in interest by just making an additional payment of $1200 a year.
Additional points to consider when increasing the monthly mortgage repayment amount.- Ensure that the additional taux amount goes towards repayment of the principal amount. Your lender is quite likely to add it to the interest amount due for the next monthly installment.
- The lender may apply only a small amount as repayment of principal and deduct the rest as service charge. To avoid any such mistakes send a separate check with precise instructions stating that the additional amount is repayment of the principal.
- Check to see that the lender has no penalties for early repayment.
- Enquire if you can make bi-weekly payments instead of a lumpsum monthly payment. Ignore this option in case the processing fee is high.
How not knowing about this saving can hurt you
The mortgage calculator helps you automatically calculate the interest savings in pre-paying the mortgage. You simply enter the additional payment you will make each month and the time from which you will do so. The calculator will give you a comparison of the savings in interest instantly. Moreover, you can start by just adding $100 to your monthly installment and still benefit. However, ignorance of this fact means that you carry the interest burden for a longer time and waste money that can be better used elsewhere.
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Mortgage Application & Credit rating
As everyone knows, your credit rating is one of the most important numbers that you have it affects your ability not only to get a mortgage, but a car loan, credit card, or store credit, as well the interest rate you are given. A good credit rating is so important that some financial experts even advise you to make sure you have a good credit rating before even thinking of applying for a mortgage.
When you apply for a mortgage, the lender can access your credit report that is compiled by information supplied by the three main credit-reporting agencies, Equifax, Experian and TransUnion. Your credit score is going to be somewhere between 300 and 850, based on your record of paying back loans in the past.
Your all-important credit score is based on several factors, including the length of your credit history as well as the credit you have available and the amount of credit you have used. Whereas everybody is late with a bill occasionally, a lender is also looking for a stable record of paying bills on time to many late or missed payments can have an adverse effect. Your employment history and the number of credit cards issued to you are also important factors.
It is basically all about the risk factor home buyers who have a history of paying back loans and paying bills on time have much less of a chance of defaulting on their mortgage loan and are therefore less of a risk. The mortgage industry has calculated that if a person has a high credit score for example 780 the chances of them becoming three months behind in their payments are almost 1 in 600 and statistically, a person with a low credit score of 600 has a 1 in 4 chance of becoming three months behind on payments.
Borrowers who have high credit scores defined as being 760 or over will generally have more choices available when it comes to qualifying for a mortgage, as well as being able to benefit from lower interest rates. If you have a score in the 600 to 700 range, you will not have any trouble getting a loan for your new home but you may be paying back the loan at a higher interest rate.
Generally speaking, a score of around 500 is about the lowest that will qualify for a mortgage. If you fall into this category, you may have to shop around to find a lender that is willing to work with you; and your interest rate will probably be higher. Some lenders specialize in providing loans to borrowers who have poor credit - these lenders are often referred to as sub-prime lenders. One possible solution for those with a very low credit score is to consider applying for an FHA loan, which tends to use different criteria to qualify people.
A low credit score can make a big difference in the amount for which you will qualify, as well as the amount of your monthly mortgage payment. An interest rate of just one point less will mean a savings of around $5,000 on the average 15-year mortgage and even more on a typical thirty-year mortgage around $50,000. In addition, a credit score below 630 can mean monthly payments that are between $50 and $250 higher.
There are some things you can do if you need to raise your credit score. Firstly, check your credit score and make sure it is accurate an estimated 25% of credit reports have what might be described as serious errors on them. These mistakes can be corrected, but this can often take up to several months not an ideal situation if you are just about to apply for a mortgage. Even a small error on your report can affect your score and the mortgage interest rate, which you are offered.
If at all possible, try not to make a major purchase such as a new car just before applying for a mortgage, as it will lower your credit score. And pay off as much debt as you possibly can this will help to lower your debt to income ratio and raise your score. If there are some small outstanding debts on your credit report, consider taking care of them before applying. Do not let bad credit stop you from applying for a mortgage even with a low score; it is still possible to be a homeowner. Your credit rating is very important when it comes to obtaining a mortgage and it can affect your chances of purchasing that new house. If your score is low, consider looking into ways to improve it, and you should be able to get a mortgage at a great rate.
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Compare Mortgage Rates
Most people know it's important to compare mortgage rates before they purchase or refinance a home. Some may even know to compare fees, points and other costs associated with purchasing or refinancing their home but, there are some things you didn't think about or just don't know.
You may not be able to get or even want the advertised rate. The super low rate may be for a 2-week lock in period. Unless the lender can guarantee you will close escrow in 2 weeks, you need to find out what rate you can get for a 30-45 day interest rate lock, or whatever you feel comfortable with.
You should try to avoid having your credit run until you've decided between 2-3 lenders. You can request a pre-approval from 3-4 mortgage companies, some of whom will get rates quotes from several lenders and give you the best 4, giving you a total of 10-12 quotes. Note that these are only estimates if they haven't run your credit. Be sure to read the terms for the pre-approval estimate
Ask the lender if they will provide your credit score when they do run your credit. You should have an idea of what it is, but it's nice to know what the recent score is as this will affect the interest rate you get.
Beware of the "no cost loan". It will probably have fees included in the loan, increasing the interest rate and simply not cost you any out of pocket costs. If you don't have the money, try to get it somehow if you can.
Ask for all the fees you will have to pay before having lenders run your credit. Some may not want to give it to you. The good/honest ones with nothing to hide will, at least as much as they can before running your credit. Some fees may depend on your credit score.
Be sure you can prepay the loan or have a bi-monthly plan set up if you want to without additional charges. Find out how often they re-calculate the outstanding mortgage interest. You want them to do it daily or at least monthly, but definitely not yearly. What if you want a bi-monthly mortgage later on or you get a large bonus and want to apply a little to the mortgage; if they don't re-calculate often, you'll pay the interest on the old balance and not the new one. This can add up if it's for a whole year.
When shopping online for mortgage rates, be sure you are on a secure page when sending your social security number over the Internet. You should see a small yellow lock in the lower left corner of your browser window and an "s" next to the "http" in the URL area of the browser window.
Another tip when shopping online for mortgage rates, find out if they process everything online and send you an email or if they have to call you with the quote. Try to get the former. You don't really want a bunch of people calling you to try to talk you into a loan. You do want the option to call them and ask them questions without having to wait.
Sometimes you can get a small percentage point off if you have your mortgage automatically deducted from your checking account. This is a good thing, just be aware with whom you are dealing with and what you are signing, read the fine print. Buying or refinancing your home is important and will affect your life for a long time, so don't take it lightly, be careful and be prepared, you'll be glad you did.
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