If you are getting a fixed-rate mortgage, one thing that you may have heard about is the amortization schedule. If you're unsure what it is, here is what you should know.
Interest Payments Change Over The Mortgage
While you are getting a fixed-rate mortgage, many people don't realize that the interest rate is not consistent over the entire length of the mortgage. The advertised rate of a fixed-rate loan is the average interest rate over the entire life of the loan if paid in full. Those initial months of your mortgage will have the same monthly payments as the months toward the end, but your payment is made up of a lot more interest near the beginning.
The amortization schedule breaks down exactly how much you are paying in principal and interest for each mortgage payment over the life of the loan. This makes it very easy for you to figure out how much equity you'll have in your home at any given point of the mortgage. You simply add up those principal payments in the amortization schedule.
Interest Can Be Reduced With Additional Payments
If you want to reduce how much interest you pay over the life of the loan, know that you are able to make additional principal payments. These payments essentially shorten the length of the loan by reducing the principal balance. Since you will owe less on the loan, the interest that you pay each month will be reduced as well. Your payments will remain the same, but you end up putting more of those monthly payments toward the principal.
Most mortgages allow you to make additional monthly payments without paying a penalty. You can do this as a one-time lump sum, or simply by adding on extra money to your monthly payment each month. Just make sure to clarify that the extra money is supposed to go toward the principal balance.
Interest Rates Can Be Lowered By Purchasing Points
If you want to find ways to lower your interest rate at the start of the mortgage, know that it is possible to purchase mortgage points through your lender. By paying a one-time fee at the start of the mortgage, you can reduce your interest rate by a fraction of a percent for the entire length of the loan. This may not seem like a lot, but if you plan on staying in the home long enough, it can pay off over time. Ask your lender for a new amortization schedule based on if you were to purchase points toward your mortgage to see the savings.
For more information, contact a company like Right Trac Financial.
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