Understanding the Costs
Since buying a home is the biggest single investment you're likely to make — it's crucial to understand all the factors that affect the cost of a mortgage. With that information in hand, you can be more confident as you look for the loan that will work best for you.
What you'll pay over time if you take a mortgage depends on three things:
- The principal, or the amount you borrow.
- The interest rate, or percentage of the principal, you pay to borrow.
- The loan's term, or how long you take to repay.
Of course, the more you borrow, the more you'll have to repay. But you might be surprised at the difference that the interest rate and the term have on the cost of your mortgage.
Tip number 1: Longer terms mean lower monthly bills, but significantly larger total costs.
Tip number 2: The higher the interest rate, the more the loan will cost.
In this example, you can see how those rules work. Take a look at two $100,000 mortgages with different terms — 15 years and 30 years— and different interest rates.
| Amount of monthly payment | ||||
| Interest rates | ||||
| Term | 6.5% | 8.0% | ||
| 15-year |
$871 |
$956 | ||
| 30-year | $632 | $734 | ||
| Total of all payments | ||||
| Interest rates | ||||
| Term | 6.5% | 8.0% | ||
| 15-year |
$156,780 |
$172,080 | ||
| 30-year | $227,520 | $264,240 | ||
Shopping
While it's suggested you shop around with various lenders before deciding which one may get your business, it's likely the lender may not be able to provide you with a firm rate quote until you actually apply for a loan — so the lender can request your credit report and see your credit profile and score.
If this is the case, be sure to do as much comparison on other features, including application costs, fees and services, before you narrow down your choice of lenders. If you decide to apply with more than one lender, concentrate your application within a fairly short time frame, say two weeks, so the multiple requests for your credit report don't hurt your score.
