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How Do Interest Rates Affect My Mortgage Payment?
Dated: February 1 2019
Ok, let's break it down. Your mortgage payment is typically allocated like this:
- Principal [the price you agree to pay for the real estate you're purchasing]
- Interest [the percentage charged to the borrower for the loan]
- Escrow [cover property taxes & home owners insurance]
Once you're under contract on a property, let's say the seller accepts your offer for $500,000 - this is the principal. This is the amount you've agreed to pay for the home you want. If you have saved up for a down-payment, this would reduce your principal.
The interest rate is dependent on several factors, such as your credit score, your co-borrowers credit score, the current interest rates and the type of loan you're using. Some lenders, depending on the type of loan, allow borrowers to purchase points. This basically means you might be able to purchase half of a point for a small amount so you can impact your mortgage payment positively.
The third part of your monthly mortgage payment is the escrow portion. Escrow is essentially an account you don't have access to, but the mortgage company who manages your loan places a portion of your monthly mortgage payment in an escrow account to cover any property taxes and insurance premiums. Usually you have home owner's insurance, but sometimes the property location can require flood insurance, hail insurance, etc.
Here's an example:
Loan [30 yr term]: $200,000
3% interest rate = $843/month
5% interest rate = $1,073/month
Total owed [3% int. rate] = $303,544
Total owed [5% int. rate] = $386,513
(Note: interest rates change daily and everyone's credit history differs, so this example doesn't represent your results)
Interest rate fluctuate daily, so most lenders will allow you to "lock in" your interest rate if during your home buying process the rate dips really low. They will communicate with you directly to advise you on what to do and how the interest rates are currently behaving. This is why it's important to have a loan officer that knows how to time locking your rate, provide the most loan options and help you take advantage of grant money to cover closing costs/down payment.
Let us know if you want us to get you in touch with a loan officer we trust... because we've actually purchased real estate with them, personally.
Born in Florida, but I got to Texas as fast as I could! I’ve spent almost my entire life in the Dallas area and I’ve seen it change, grow and flourish. Whether you’re relocating, wanting to buy ....
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