Mortgage payments – a look at cost & choices

Unless you have some hefty financial backing, the only way of buying a home is going to be by getting a mortgage. Let’s take a quick look at the process from start to finish, looking at the impact your choices can have on the monthly cost of buying your home.

Step 1: Choose your property

At the start of your quest, you have to find the right home for you. Not just right for your needs but also right for your budget.

There are so many variables when it comes to property. House or flat? How many bedrooms? How good a condition? How ‘posh’ an area? How close to local facilities?

Compromise on one of those criteria and you could really win out on another – if you’re good at fixing things, for example, you might find a large house in a good area for a decent price, as long as you’re prepared to put the work into fixing it up.

Just remember: in general, the cheaper the property (as a multiple of the deposit you can put down), the more likely you are to find a mortgage deal you’re happy with.

Step 2: Choose your type of mortgage

Fixed or variable? It depends on what you’re looking for. If there’s not much leeway in your monthly finances, you’re probably better off with a fixed-rate mortgage. Whatever happens to central bank rates, your payments won’t change.

If you could afford an increase in your payments, however, that means you’re more free to look into the variable-rate mortgages that don’t deliver that kind of stability, but may offer a lower rate to start with. Depending on how long the bank rate stays low, this could really pay off – but you’d have to be prepared for an increase.

Whatever you’re looking for, it’s vital you make sure your mortgage is affordable, as your home could be repossessed if you can’t keep up with your payments.

Step 3: Choose your term

Next, you need to think about the length of your mortgage term. Basically, a shorter term means larger monthly payments but a smaller overall cost, while a longer term will cost you less each month but more in the long run (as the mortgage will have longer to accrue interest).

Many people choose to start with a longer mortgage term, then move to a shorter one – if they can afford it – when it’s time to remortgage. If it’s done right, this can be a way to get a foot on the property ladder.

Wondering about the cost?

Finding a house and a mortgage. It’s a big job – and it’s vital you put enough work into it, making sure you get a mortgage deal that you can realistically afford.

Using a mortgage calculator can give you a good idea of how much you’d pay under different conditions – i.e. depending on:

  • The mortgage amount
  • The length of the repayment term
  • The interest rate you’re offered.

 

Do Bi-Weekly Mortgage Payments Help You In the Long Run?

If there’s one thing that homeowners don’t like when it comes to their home loans, it’s definitely the interest. Wouldn’t life be easier if there was less interest to pay? After all, interest doesn’t help you at all — it’s profit to the lender, because they are letting you borrow the cost of the home over time. If you’re thinking about trying to pay off your loan faster, you will need to actually deploy some strategy. Thankfully, it’s not really as hard as some people make it out to be.

Most lenders these days realize that people want to pay off their mortgages sooner, and even have payment plans for you to do it. You can pick up a bi-weekly mortgage payment plan, where you get to make half your full mortgage payment every two weeks instead of once a month. 26 half payments add up to 13 full payments, which is one more payment than you would have made under a traditional plan every year. It doesn’t seem like much, but the math really is in your favor. Here’s why.

Most of your payments are going to tackle both interest and principal, which means that your principal will go down slowly with time. However, what happens to that extra payment? It’s actually all principal, which can help bring the balance down a lot sooner year to year.

Your lender will most likely charge a small fee to set up the bi-weekly mortgage plan, as it will be deducted from your bank account every two weeks. Very rarely will the lender just trust you to send in half now and half later.

What to see the numbers in action? Let’s take a modest mortgage with a balance of 150,000, a 30 year term (360 months), and an interest rate of 6% — not too bad, right?

Your monthly payment, which includes principal and interest, would be about $899.93. So let’s go bi-weekly!

Your payment every two weeks is $449.67. The total interest during the life of the loan is 135,294 — compared to the 173,757 that you would normally pay. What’s pretty is that the loan is paid off in 24 years instead of 30. That’s a lot of cash saved and it doesn’t really affect your family’s lifestyle at all. It might take some getting used to, but the benefits of bi-weekly mortgage payments are truly tough to beat!